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Wednesday, December 17, 2008

Oil, And The Calvinistic Conscience Problem, Part 1

I don't have a problem with Al Gore being a religious nutcase. He can worship Gaia and wave his carbon offset fetishes all he wants - that's protected by the US Constitution.

I do find it amazing that so many seem to need to walk up and donate when he passes the plate. For what? What do you expect to get out of it? Gore's an old-fashioned southern stump preacher pushing a slightly different doctrine, but I note that he passes the plate just like they do and he lives like the most successful and most hypocritical of the breed.

Perhaps you folks who are falling for this junk need to go to church more and listen to some fire and brimstone sermons. That should allow you to assuage your Calvinistic consciences in a more adaptive manner.

Prominent among the Gorish doctrines is the idea that US gas prices are too low. Too low for what, you ask? Too low to force Americans to adopt more environmentally responsible lives, he answers, as he descends from his jet, climbs into his SUV and drives off to his mansion, escorted by Secret Service vehicles. But that does not ring a skepticism bell in your Calvinistic conscience, which is why I think Americans are acting out some cultural mandate. Even Americans aren't this stupid.

I'll pick on two non-stupid people who I think have strong focuses on duty: Tom Carter at Opinion Forum and Carl at No Oil For Pacifists.

Tom Carter read this WaPo editorial and got all enthused about a federal gas tax hike, quoting from the editorial to explain all of the wonders this will accomplish:

…would stimulate the market for new fuel-efficient cars; defund mischief-making petro-states; and cut carbon emissions. Not only that, it would reduce traffic, curb urban sprawl and, by giving drivers an incentive to drive more slowly, improve highway safety. …

A higher gas tax would buy valuable public goods: national security; a cleaner environment; and safer, less congested streets. No matter what, Americans will have to pay for all of that. Why not do it the simple, straightforward way?

Carl looked at the oil situation mostly accurately, but concluded that federal intervention was necessary to prevent a "market failure".
This, of course, is the dilemma of both new fossil fuel fields and alternative energy development: Pumping crude from under Arabian and Iraqi deserts costs under $5/barrel; oil sands/shale, new off-shore drilling, and all renewable sources costs well more. Falling oil prices--or, what is the same thing, increased OPEC production quotas--can wipe-out alternative capital investments at a stroke.

This, I think, is the principal energy market failure, and the sole area where (departing from MaxedOutMama) I support government intervention. Not a gas tax, but perhaps forward government energy purchases to keep energy projects active during periods of falling crude prices. It's better than rooting for the OPEC cartel to cut supply.

I hate to get in the way of all of these bugle calls to duty, honor and self-sufficiency, but let's be honest. If the market cannot absorb the cost of oil at $100 a barrel without the world economy tipping into a recession, then a retraction in the demand for oil and consequently lower prices are not a market failure. Those consequences are instead the effect of the market functioning. The reason that the alternative energy sources will be wiped out is therefore structural reality in the world economy, and raising the cost of oil artificially to compensate will just prolong and/or deepen the disaster.

If you want to dispute the bolded statement above, please explain why the energy prices that collapsed the world economy will be any less damaging if you are using biodiesel. Seriously. I await this explanation with great interest. We know we can produce biodiesel at $95 a barrel. We may be able to eventually do it at around $75 a barrel in reasonably large quantities. Let's be optimistic and say we get it to $65. What's it going to do to our ability to compete and produce goods if the rest of the world is slurping oil up at $38?

Brazil produces ethanol at substantially lower costs than recent gas prices, but the US government imposed a high tariff on Brazilian ethanol to prevent it from beating out US-produced corn ethanol. In 2006, after adding transport costs, etc, Brazilian ethanol should have had a wholesale US price of slightly less than $2.00.

So the effort, all told, in the US of government policy has not been to fuel alternative energy in a cost effective manner - no, it has been mostly a vote-buying mechanism which had unfavorable implications for the many sectors of the US economy. (Background: see the much higher energy efficiency of ethanol in Brazil, and a CARD article.)

Electric vehicles, if we ever decide to start producing enough cost-effective electricity to power such a fleet, are also a possible alternative.

But do we really need to worry about importing oil from Canada? Seriously? The major effect of the current downturn in oil prices is that it will knock out some investment in the oil sands there. To recover start up costs, it's estimated that an assured market cost of over $45 is necessary for most of the planned projects to be built and recover their capital investment cost. This is so far below the cost of biodiesel and US-produced ethanols that it is obviously the better option. Besides, we like the Canucks, we trade with the Canucks, and it is very much in our interest to have a strong, healthy Canuckian population up there, nor does buying oil from the Canucks contribute to any world disaster of which I am aware. So we are subsidizing a few gay parades. Is that going to kill us?

A lot of Canadian oil sand projects were planned. The Saudis really want to let costs drift just below the magic Canuck price line (see Wikipedia article):

Countries like Iran have to be pretty worried about that projected doubling of production from Canada's Athabasca sands by 2014. So, you say, I'm making Carl's point? Well, unless we outright subsidize the Canadian oil sands, raising internal energy prices won't move those projects into production. We could do that, you know. We could tell Canadian producers "Here, chaps, we'll write you a contract guaranteeing 20 years of purchases at $43 per barrel for all you can produce", and let them take that to the bank. It's a better profit margin than US Treasuries right now, so it ought to have considerable value.

But we won't. Doing so would raise questions about why we should subsidize Canadian oil mining when we won't allow it in the US. The US has big oil shale deposits, and the estimate for production runs right around $45 a barrel. Writing such a contract would get those projects in gear, and would greatly stimulate the US economy. Further, oil shale deposits are better suited to diesel production; world demand for diesel is rising far higher than for gasoline, and it is the demand for diesel that is our worst oil sufficiency problem, and the segment of the that problem least addressed by measures such as auto efficiency, electric vehicles, and ethanol.

But we won't. Anyone reading this knows we won't. The US federal government has already blocked the development of those projects when it was outright feasible to do so and when it would have required no federal subsidy. Why are we so psychologically invested in "alternative" energy sources? Why?

We already get more crude oil from our Canuck neighbors than from any other country. EIA report:
Crude Oil Imports (Top 15 Countries)
(Thousand Barrels per Day)
Country Oct-08 Sep-08 YTD 2008 Oct-07 YTD 2007


Nor can I see why we should worry about imports from Mexico; Canada and Mexico are our neighbors, and we should want them to prosper. The reason we currently buy oil from Saudi Arabia is that it is cheap, but if we were to develop more of our own resources, and if the planned Canadian projects went ahead, I think the US would be in a good position with regard to oil.

We'd be in a better position with regard to oil if we stopped focusing on pie-in-the-sky measures and started focusing on the highly achievable stuff that requires minimal government subsidy. However, that doesn't mean biodiesel, etc, except in the smaller projects. It also doesn't mean much wind power. It means coal or nuclear or both for electricity consumption. When the market cost of oil moves high enough to make electric cars an option, they will come. Until that time, they are wasteful boondoggle; the money spent subsidizing Prius purchases would have been far better spent subsidizing Hyundai purchases. It's energy efficiency that matters. In terms of energy, the political structure in the US is recommending a diet of pure potato chips - and offering to pay for it. The long-term health effects will produce a severely malnourished economy!

There have been only a few oil shocks post WWII, and each has resulted in a global economic downturn. (See Roubini/Setser 2004). Note that the "shock" price they are worrying about is about the average price of the last month. Do we really want to raise total energy costs more than the "shock" price about which Roubini was worrying then? Trying to artificially raise the cost of energy now will just cause worse economic problems, which will further decrease the price of oil, which will cause alternative energy to require even greater subsidies. It's a losing battle.

To consider further, take the example of the Brazilian ethanol industry. It has been a success, but the US does not currently have the capacity to produce ethanol nearly as efficiently as Brazil. Further, the success is limited. The end result of the Brazilian ethanol industry is that about 20% of vehicle miles are powered by ethanol. The trucks and so forth still run on oil.

In part 2, let's take a look at that outstandingly silly WaPo editorial. Even for WaPo, it is hilariously superficial.

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