Politically-Induced Alcoholism.

Steven Ratnner has penned an excellent critique on the ethanol racket in the United States. He states clearly what many pols know but dare not speak: the US program to promote ethanol production for transporation fuels drives food prices up, is comparable in the energy to produce it than in what it displaces in petroleum, has led to a bizarre and contradictory arrangement of alcohol and petroleum imports and exports, and is a green pig-in-a-poke. But ethanolism does mean big federal subsidies to the agribusiness interests of the corn belt, including Iowa, an early presidential political milestone.

Postscript: a new AEI report on ethanolism can be found here.

Ultra Premium Irony.

Yesterday the United States Government announced the release of 30M barrels of oil from the SPR to help ameliorate the effects of rising oil prices on economic recovery. We note, however, the effect of the Gulf drilling moratorium and glacial rate of new drilling permitting imposed by the Administration has been to reduce domestic oil production by 240K barrels per day, or nearly 90M barrels over the last year. And then there is the knock-on effect of lost jobs in the Gulf region. The White House can't be as clownish on this as they appear...can they?

Pointless, Valueless Theater.

Tony Hayward, CEO of BP, is not an Oil Man. His pedigree is finance, serving in the corporation's Mergers and Acquisitions department for the majority of tenure at BP. In today's testimony to Congers, it was very clear that Hayward was not there to answer questions specific to his expertise, but was summoned so that Congresscritters could look good to the "little people" by ranting at him. Not that they understood the significance or triviality most of the technical questions they threw at him. If we were offered a seat along side the Critters, we would have asked the following questions:

1. When you became CEO of BP and directed a "laser-like focus" on improving safety, at that time were you made aware of any drilling, production, refining, or petroleum transportation activity that was operating with unacceptable bounds of safety, regardless of whether they met federal oversight requirements? For example, were you told that the overall approach to drilling procedures could allow operations with an amplified risk of failure or accident? Were there operations that you unilaterally halted because of safety concerns?
2. As CEO you receives safety briefings that were at the highest level, with little technical detail for evaluation. Basically, you are given "red light - green light" status reports of safety initiatives. Who in the BP organization does have the responsibility to evaluate the technical criteria to assess whether BP operations were improving in safety? What reports were you getting from these personnel about the state of drilling safety?
3. What conditions did you place on your subcontractors, Transocean and Haliburton, in decision-making for safe practices on the rig? Did either have veto power over procedures directed by BP personnel?
4. What are the experience requirements for BP rig managers? Does a single BP manager have authority for rig operations?
5. What direction or guidance were you given by MMS as part of your improved safety initiatives? Did you solicit input from MMS for this? If so, what was their response?

These hearings can be quite valuable in determining the structure of risk manangement and decision making for operations of BP and the other producers in the Gulf, and the interaction of MMS. Or they can be useless theater.

Calling Gene Kranz!

There are Oil Men who know what to do. We don't care who they work for or where they live, pound on their doors and get them in here!

The Failure of Risk Management.

Nansen Saleri, former head of reservoir management for Saudi Aramco, provides a non-hysterical, apolitical, and sober analysis of oilshore oil drilling in the shadow of the Deepwater Horizon accident. His claim is that the principal failure that lead to the catastrophe was that of effective risk management. Saleri also reminds us that shutting down offshore drilling may actually increase the risk of another oil spill from much more vulnerable oil tankers.

The Volt's Electric Appetite.

Electric cars are being offered as die Wunderlösung to solve our transportation system's dependence on petroleum. But what would the wide-scale adoption of electric vehicles require in terms of increased electricity production?

We will take as a representative electric vehicle the Chevy Volt. The Volt is expected to operate such that it will consume 8 kW-hr to provide 40 miles of driving (which is a reasonable assumption for a day's mileage of a passenger car). The total distance driven in passenger cars and light trucks in the United States in 2008 was about 2.4T miles. If half of that distance were to be driven in Chevy Volts, the total required electricity to support this yearly travel budget would be about 240M MW-hr.

Note that the total electricity generated in the US in 2008 was about 4.2B MW-hr, so we would need to increase our generation capacity by about 6% to support the widespread use of electric vehicles. In terms of electric-power generation plants, this would mean we would need to build either 20 new nuclear-fueled plants, or 60 more coal-fired plants. This is a substantial investment in infrastructure; a typical coal-fired power plant runs about $1B to build. By the way, using the effective yearly output from a 2MW wind turbine, the number of turbines one would need to provide this electricity would be about 40,000 at a cost of about $120B just to install the turbines. Good luck with that.

One could argue that the energy needs for electric vehicles could be met with the present inventory of generating plants combined with an diligent electricity conservation program. Maybe, but it will take some fancy footwork when combined with the needs for increased electrical power to support robust economic growth.

Then there's the matter of the onerous cost of electric vehicles, but that's another detail the Ultragreen crowd likes to sweep under rug.

Clunker Math.

A good friend made the following observation. A "clunker" that gets 12 mpg, driven 16,000 miles in a year consumes about 1300 gallons of gasoline, while a replacement car at 30 mpg uses about 550 gallons. So retiring a million clunkers will save about 750 million gallons of gasoline, equivalent to 37.5 million barrels of oil (a barrel is normally distilled to yield about 50% gasoline). At $70 a barrel, this means we are spending well in excess of $4B in clunker funding to save $2.7B in petroleum imports this year. This calculation is being very generous in estimating oil savings; the net mpg difference of the clunkers program is substantially smaller, and other distilled petroleum products need the crude oil, too. The clunkers program would have been better run by the Department of Agriculture, for they have extensive experience running subsidy programs.

Nuclear Ready.

Duke Energy's CEO Jim Rogers writes in the WSJ that unlike other "green" energy industries, the strong suit in America's hand in clean electricity generation is nuclear technologies.

Some Carbon Math.

The U.S. House of Representatives passed an heavily amended version of the Waxman-Markey "Cap and Trade" Bill, which beginning in 2012 levies a tax to emit carbon dioxide at a rate of $13 per ton. This rate will increase steadily over the years, with the goal of forcing reductions of CO2 to less than 17% of current emissions by 2050 (83% by 2020).

The CBO claims that such a tax will cost the average household only $175 in energy costs by 2020. Shall we check the numbers?

The current total US emission of CO2 is about 6400 million US tons per year. The 2012 tax on this CO2 emission will total $83B. If we assume that all of this tax ultimately will be assessed on the 185 million taxpayers in the country (all costs to utilities, manufacturing, transportation, etc. are passed on to the total taxpayer base), the total 2012 tax increase on average per taxpayer is about $450. About one third of the taxpayers actually pay no tax; if we assume that this will also be the case for the CO2 tax (the bill provides for a CO2 tax credit for each lower income household), then the total burden in 2012 per net paying taxpayer will be more like $650. So, a household of two taxpayers will get walloped with an effective $1300 CO2 bill.

To account for the huge disparity with the CBO estimate, either the government will force some entities upstream in the cost flow to eat these costs - with accompanying adverse consequences to the economy, or only a fraction of CO2 emissions will be taxed, which defeats the purpose of the legislation. Something doesn't quite make sense here, and we will post clarifications or revisions to our estimates if the need should become evident.

Intellectual honesty requires us to disclose that we do detect some faint strains of free-market environmentalism in this approach, which has appeal. Free-market environmentalism applied to fair-value pricing of federally owned timber or mineral resources makes sense, since such environmental effects are nearly wholly confined to the land mass of the United States. We could in principle tax ourselves to oblivion for CO2 and do nothing about the increasing emissions from industrialized China and India. Perhaps we could send them the bill?

P.S. - Intellectual honesty, too, would require Democrats to concede that nuclear power must play a prominent role in reducing our dependence on fossil fuels for energy generation. We will not hold our breath for such a proclamation.

Addendum: The Heritage Foundation has produced a bar graph showing the increased household energy costs caused by Waxman-Markey through 2035.

Ethanol Rises from the Grave.

A farmer lobbying group is leaning on the Congers to have the EPA bump up the blend requirement on ethanol in gasoline. Their talking points can be found here. Ah, what the free market kills government can revive. Find a way to make it a lot cheaper and using less fossil fuel and water, and we'll talk boys...

The Ethanol Industry Implodes.

The Manhattan Institute's Max Schultz provides an update of the corn-fed, government-led debacle.

Clean Coal Dreams.

Jim Cramer interviewed Gene Klappa, the CEO of Wisconsin Energy Corporation, which has been aggressively experimenting with CO2 scrubbing of coal plant emissions. The field experiments have been a failure so far, and Klappa estimates that a "clean coal" solution that can be practically fielded is at least ten years off. Meanwhile the Obama Cap and Trade Juggernaut rolls along. It is now estimated that when C&T is implemented electricity costs will increase by 50%. Just in time to strangle a recovery of the U.S. economy.

In ten years, we could build five nuclear plants, displacing 25 coal-fired plants. That's if we chose to "put science ahead of politics". Wisconsin, in a spasm of self-righteousness, has banned construction on any new nuclear plants.

By the way: 300 additional 1GW nuclear plants would displace the electricity generation of all of the 1500 coal-fired plants in the U.S. Do we have the political will and the seriousness to consider at least five nukes in ten years?

Obama Revealed.

President Obama spoke to the Congers last night, and made it very clear that the spending has only just begun. In this first year of his tenure he intends to tackle (universal) health care, expanded federal support for education, and a plunge into "green" energy production. This last objective is of particular concern: the WSJ noted this morning that White House green gurus indicate that the Administration will regulate CO2 as an atmospheric pollutant under the Clean Air Act . In which we reply, in the words of Cromwell: "I beseech you in the bowels of Christ think it possible you may be mistaken". As we have learned with the declarations of vague schemes by the Treasury for the next stanza of financial reconstruction, now is not the time to further paralyze private capital investments in our economy because of fear of brave new regulations. And the President's call to action on energy conspicuously dodged a mention of nuclear power. If we are going to supplant coal-fired electricity generation, we need to find sources that can efficiently produce several hundred thousand megawatts of energy. A wind plan as ambitious as that envisioned by Boone Pickens would produce 200,000 MW. While that's a very respectable number, it's less than a quarter of our current electricity demand. Our fear is that the White House greenies will prevail in ideological purity and America's aversion to nuclear power will continue.

House Democrats Pelosi and Waxman Unveil New Green Vehicle!

Feel Good Green.

The Instapundit noted the following article about a Tennessee man who converted his 1994 Chevy S-10 to electric power for a mere $12,000. The two dozen batteries that are used will need to be replaced in three years, at a cost of about $3000. His gasoline bill was about $5000 a year, so he breaks even in year four. He could have bought a new S-10 for less, with better gasoline fuel economy. Yes, we're being a green humbug, but this report has as much signficance to practical garage-based energy solutions as a that about a waterskiing squirrel.

A Proposal.

It's possible (probable?) that either GM or Ford (or both) will soon get in line for their helping of Goverment Cheese, i.e., federal bailout money. Would it be anti free-market to then require that 50% of their 2013 model year vehicle fleet be electric, hybrid, CNG, or E(M)85 powered, with an effective in-service fleet CAFE standard that would reduce gasoline consumption by 40% by 2020? There are tangible financial and strategic advantages for the government in achieving this (keeping petrodollars in the country and energy security), and consumers would not be forced to buy these vehicles. And they can pay us back over time, with E-Z terms.

Thoughts and comments are always cheerfully accepted.

Postscript: Well, Holman Jenkins strongly disagrees with such a proposal. His arguement - that CAFE standards forced the Big 3 to loses billions producing small cheap cars that consumers didn't want - makes sense to explain their problems in the '90s when oil was less than $20 per barrel. But at the current $100+ per barrel, consumers are ditching their lower mpg trucks and SUVs for higher fuel economy vehicles. The Ford Focus, for example, with 35 mpg is a hot seller right now, while F150 sales have dropped by nearly 25% this year. GM's Rick Wagner has announced that there has been a fundamental change in the market toward fuel economy, and that this change is more likely than not irreversible.

Perhaps $100 oil for the forseeable future will make CAFE standards irrelevant? A decline in fleet average fuel economy from 20 mpg to 16 mpg would cost consumers about $800 per year at $4 per gallon (based on 16,000 miles driven per year), or $4800 of additional operating expense over a six-year vehicle life. One wonders whether relaxing CAFE standards could result in a lower vehicle purchase price that would compensate for this increase in operating costs and still improve the automakers margins. Again, Jenkins' arguement does make sense in the world of $20 oil. Too bad we don't live that world.

Does Sarah Palin Hate Polar Bears?

During our return to The Estate this afternoon, we caught the first half-hour of NPR's All Things (Ill) Considered, in part to see how conflicted their hosts would be about McCain's choice for VP, Alaska Governor Sarah Palin. After the typical NPR selective reporting on the event (for example, they noted the congratulatory message from the Obama/Biden 2008 office, but not the snarky statement made earlier by a spokescritter from Obama World Headquarters), the show turned to an in-depth story of the retreat of sea ice (supposedly caused by global warming, supposedly caused by human activity) in the Alaskan Arctic, and the mortal threat that this phenomenon was to polar bears.

We did not understand the connection between the two stories until reviewing Wizbang tonight, which featured an interview with the same Governor Palin by Glenn Beck made some weeks earlier. The topic was Governor Palin's lawsuit against Uncle Sam to keep the Endangered Species Act - which now extends its protective "rights" to the Polar Bear - from being used to block oil and gas production along the Alaskan Continental Shelf, ANWR, and the Alaska National Petroleum Reserve. These are the regions of Alaska where the Polar Bears of Alaskan Heritage are likely to be found.

Aha! NPR has made a link between Sarah Palin and the (potential) Ursacide of the Polar Bear: if the bears were now under pressure by losing their ice habitat, the (presumably) polar-bear-hating Palin would seek to destroy the rest of their living space for oil!

In fact, the Story of the Polar Bears, the Governor, and Big Oil has another bizarre twist: it seems the green-extremist organization Greenpeace does not want the Polar Bear listed on the current version of the Endangered Species List. This is because the revised version which included the Bear also provides that its endangered status cannot be based on global warming claims. Therefore such claims could not place other animals on the list, nor presumably force industries (read: Big Oil) to cut back on carbon emissions to (supposedly) slow global warming, which would (supposedly) help the threatened organism. Therefore, the ESA could not be used as a pretext to stop further oil and gas production by claiming that the oil and gas would increase global warming, even while the production activity in itself would pose no threat to endangered species. Thus, Greenpeace in a snit.

We really don't know know Ms. Palin's disposition toward the Polar Bear, although the photo above (from the Anchorage Daily News), indicates that she appreciates bearskin in general. We do, however, know her view of Moose: great in stew.

Note: No Polar Bears were harmed during the writing of this article.

Shall We Drill?

Debate now rages amongst the Congerscritters as to whether we should expand domestic petroleum production - offshore, in ANWR, and western oilshales. The answer one reaches depends on the ultimate goal of an energy strategy. If it is to eliminate our dependence on foreign oil, no amount of drilling is going to accomplish that goal. But there is an immediate need to halt the growth in the flow of cash used to buy foreign oil, and possibly reduce it. So expanding our drilling is likely to be an essential component of a short-term strategy to buy us some time - say, twenty years - to develop other energy sources, particularly for transportation fuels.

Let's look at the likely reserves and production rates for ANWR, offshore, and new oilshales, and when their production could begin:

• ANWR. The Energy Information Agency states a mean estimate for technically recoverable oil in the ANWR "1002 Area" (the most promising region of ANWR and constituting about 20% of its total acreage) of 10.3 billion barrels. A USGS assessment from 1998 states that the mean amount of economically recoverable oil from the 1002 Area is 7.7 billion barrels. Peak production from the region is estimated by the EIA to be about a million barrels a day, about 5% of our current total daily petroleum consumption. Using the smaller mean reserve estimate, this means ANWR oil would last at least twenty years. Production could not begin for 7-12 years, primarily because of the time required for lease sales, permitting and environmental reviews. These steps could be accelerated.
• Outer Continental Shelves (OCS). The Department of Interior's Minerals Management Service estimates the mean total OCS oil resources to be 85.9 billion barrels (technically recoverable) for the Atlantic, Pacific, Alaskan, and Gulf of Mexico Shelves. The GOM and Alaskan Shelves constitute about 41 and 27 billion barrels, respectively, of this total estimate. The total OCS reserves that are currently unavailable to production because of state or federal moratoria is 18 billion barrels (Eastern GOM, Atlantic and Pacific). So most of the OCS is open to development. The GOM OCS is developed, with nearly 1600 leases producing 1.4 million barrels per day. If one prorates a potential Alaskan OCS production rate based on this number and the relative size of the Alaskan OCS resource, this yields a production of 0.9 million barrels per day, another 4% of our current daily consumption. If the GOM and the Alaskan OCS production rates were 150% of their current (or estimated) rates, it would add an additional 2 million barrels per day to current production, or 10% of our current consumption. Studies for Alaskan OCS development uses a target peak production year of 2030; perhaps this development could be accelerated.
• Continental Oilshales. A study by the RAND Corporation in 2005 estimated a lower limit to the amount of technically recoverable oil from western oilshales to be 500 billion barrels. RAND estimates the timescale for development to production of 1 million barrels per day may be twenty years or longer. The production rate could be as high as three million barrels per day, or 15% of our current consumption. The lifetime of continental oilshale production is very long, perhaps hundreds of years.

Here is what we can "take away" from the discussion above:

1. Assuming all of the three petroleum resources described are developed to peak production, they would probably add no more production than 30% of our current oil consumption. We cannot solve our dependence on foreign oil solely on increased domestic drilling.
2. Nevertheless, this increased production could nearly halve our current imports of foreign oil, ultimately keeping an additional $300B per year in the United States.
3. A controlling factor is the production that can come from each of these sources; apparently no more than 1-3 million barrels per day is likely to be the peak production from these sources. If we commit to increased drilling as a transitional step to alternate transportation fuels, finding solutions to increase production from oilfields will be essential.
4. The development of ANWR and the Alaskan OCS, and the expansion of production from the GOM OCS is likely to reduce our dependence on foreign oil by 10-15% within ten years, if the rate of leasing, permitting, and production can be accelerated.
5. Continental oilshales may provide a tremendous supply, and may be produced at a rate of 15% of our current consumption, but the timescale for development is long, perhaps twenty years. This resource should be developed, however, because it is likely we will still need a substantial amount of petroleum in 20-30 years.

Will the price of oil drop with this increased production? Perhaps, but not precipitously. But a good chunk of change that leaves the U.S. could be retained if increase our domestic production.

Marge, get me Halliburton on the phone!

What's in the Box? III - Energy.

Barack Obama has unveiled an energy plan, so let's check it for substance:

• A $300 rebate for families to offset rise in gas prices. From the same man who dismissed McCain's proposed suspension of the federal gas tax for three months. I guess the difference is that the taxes keep coming in, and instead we borrow the money to fund the rebate.
• A $150B federal investment for ten years in to renewable energy programs. No increased energy production, and no guaranteed results, but it will be exciting!
• Reduce oil consumption by 3 Mbbl/day by 2018, and by 10 Mbbl/day by 2030. How, exactly? The "plan" calls for improving petroleum use efficiency by 50%. That's fifty percent. How? Magic? Because we want it to be so?
• Development of "current leases" on federal land, with the claim this would double current domestic production - without the need for more offshore production nor ANWR. The Wall Street Journal has already shown that this frequently-parroted claim is a canard, relying on a fantastic extrapolation of current production on federal land. However, at least the Obamites concede that more domestic petroleum production is needed. They just need to realize that one has to drill where the oil is, rather than where one would like it to be.
• "End excessive speculation in the oil markets". This is a bone to throw to the conspiracy and class-warfare cranks. It does not result in the production in a single additional barrel of oil.
• Windfall profits tax on oil companies. See the previous point. The collected tax would then be doled out to the citizens to offset higher energy costs. Obama may want to break this gently to many of these same families whose 401Ks are invested in energy companies. Taking from one's pocket to give it right back - after Uncle Sam's cut of pork and waste.
• Doubling the CAFE standards...within 18 years. I think the private sector can handle than one quite well now, thank you.
• Nuclear power? No more nukes until Harry Reid allows the Yucca Mountain Waste Repository to be opened. Like we said...no more nukes.

That's it. Very little in the way of rapidly increasing domestic energy production, but a great deal of central planning, research and study, taxation, and wishful thinking.

Not That Thing Again!

The calls are picking up for reinstating a 55 mph speed limit to conserve gasoline. For those of us that did a good deal of long-distance driving during the Sad Seventies when this federally-ordered limit was in place, it made for great discomfort and irritation. A typical fuel efficiency curve shows a decline above about 60 mph, but other variables such as aerodynamics and weight are also important.

For Americans that drive as part of their employment - like truckers - this 55 mph limit is onerous. It means an additional 21% time on the road to deliver a given value of goods, and is physically gruelling for truckers. For a two-hour business trip (140 mi) in a vehicle that gets 30 mpg at 55 mph, the loss of fuel economy driving at 70 mph is 5 mpg, or less than a gallon of gas for the trip. The time lost at the slower speed is over a half and hour. If the employee-driver is making minimum wage, the savings in fuel costs for a 55 mph limit is lost in additional employee wages in the increased drive time, and a half-hour productivity improvment is lost (it takes more to execute a business transaction of a given value rather than using that time to execute additional business).

We believe that finding additonal sources of transportation fuels - oil, natural gas, electricity, bio-fuels - is a more important task than Share-the-Misery ideas like a lower speed limit.