PVBlog Responds to the Energy Crisis

At my Omnilore Great Decisions 2006 class tomorrow we will deal with the issue of energy consumption and its effect on US/World policy. I wrote an introduction to the topic in a recent post (Energy and Freedom, May 6), and sent out five relevant questions to some regular readers. I was pleased to receive 20 rapid responses. Here are the questions and answers, including mine in [….].

1. Are the oil companies (eg Exxon-Mobil) making unaccepable profits?
8 Yes, 12 No [No]

2. Should we increase the supply of domestic oil?
17 Yes, 3 No [Yes]

3. Should we increase US nuclear energy production?
15 Yes, 4 No, 1?? [Yes]

4. Do Hybrids (e.g. Prius) pay for themselves in the time you usually keep a car (at current gas prices)?
4 Yes, 13 No, 3?? [No]

5. Should we tax gasoline so that it is over $7.00 per gallon (to drive down demand)?
0 Yes, 20 No [No]

It is clear that increasing gas taxes to achieve a $7.00 per gallon price is unpopular, but a few respondents thought a more modest tax increase would be useful to reduce demand. I was ammused by Ann Coulter’s take: The Democrats' only objection to current gas prices is that the federal government's cut is a mere 18 cents a gallon. The Democratic brain processes the fact that "big oil companies" get nearly 9 cents a gallon and thinks: WE SHOULD HAVE ALL THAT MONEY!

Increasing the domestic oil supply and nuclear energy production were popular steps, but a few folks mentioned alternative sources and one or two wondered whether nuclear is safe. [It is safe.] The public now favors nuclear power by two-to-one, according to a Rasmussen poll. Nuclear energy is the ultimate solution for clean electrical power and reduced foreign dependence.

The Congressional energy bill requires an inventory of offshore oil and natural gas reserves -- including off the coasts of Florida and California, which prohibit new offshore drilling. But the most promising untapped supply of oil is in the shale beneath the Rocky Mountains. A report by the U.S. Energy Department announced that We've got more oil in this very compact area than the entire Middle East. More than 2 TRILLION barrels. That's more than all the proven oil reserves of crude oil in the world today, nearly 300 years of US oil consumption.

Most folks believe that a Hybrid car will not pay for itself through improved gas mileage but a few who keep their cars more than 7-8 years believe that it will. For example, the Toyota Prius gets about 33 percent better fuel economy than a comparable vehicle, according Consumer Reports, at a $5,700 price premium over a conventional vehicle.

A new type of ethanol-boosted, turbocharged gasoline engine could be the answer. The engine would be almost as efficient as gas-electric hybrids, but cost much less. The MIT researchers estimate their engine would add only $500-1000 to the cost of a vehicle, which includes the added costs of the high-end turbocharger, a direct-injection system, and a stronger, smaller engine. This modest premium compares favorably to that of hybrid cars.

The most controversial question concerned the oil company profits, with 60% of respondents believing they are not excessive but 40% thinking that they are. This split is probably related to a couple of other questions mentioned in my May 6 post: How is the price of oil is determined? What about the price of gas? But the simple answer is that the big 3 US oil companies make a modest 5% profit on gasoline sales. This is reflected in the share price. While oil prices were going up since Jan. 2003, Exxon-Mobil shares increased by 85%, not out of line with the DJI that increased 50%. In the stock boom years from 1995 to 2000, the DJI increased by 300% while Exxon-Mobil stock increased 260%.

As for the price of oil and gasoline, the factors are many. The high cost of oil exploration ensures that only the most minute fraction of that oil will be known at any given time. The price paid for crude is determined by the futures market and depends on global supply uncertainty more than any other factor. The high cost of extracting and processing oil ensures that not even half of the oil in a known pool of oil will be brought to the surface and sent off to the refineries. (at today’s oil prices) Refining capacity in the US is a major factor in the price of gas at the pump. Partly due to excessive governmental regulations there has not been a new refinery built in the US since the 1970s.

Other questions supplied by Omnilore include these.

Where do you stand on the continuum between free markets and a command economy? I stand squarely on the side of free markets. If the government did nothing about oil prices, rising prices would lead people to reduce their use of oil and also lead producers to drain some of the more costly oil out of the ground.

How do you choose a car? I start with performance and styling then reliability. Thus my Porsche.

Where does the Hydrogen come from for the future fuel cell powered cars? Hydrogen comes from the electrolysis, splitting water molecules into hydrogen and oxygen using electricity. It's still far too expensive to be widely practical, but researchers at GE have come up with a less expensive, easy-to-manufacture apparatus that can produce hydrogen via electrolysis for about $3 per gal. -- down from today's $8 per gal. The research team came up with a way to make electrolyzers largely out of a plastic (GE Noryl) that is extremely resistant to the highly alkaline potassium hydroxide, easy to manufacture and relatively cheap.

What is your opinion of the fuel ethanol? Biofuels, such as ethanol made from whole plants, could have a significant impact on reducing both carbon dioxide emissions and our dependence on foreign oil. In theory, the same amount of carbon released when the biofuel is burned in engines would be sucked up by the next year's fuel crop. An Energy Department study estimated that the United States could produce 1.4 billion tons of biomass annually for conversion into fuels, potentially supplying 40 billion gallons of fuel a year compared to current US consumption of 110 billion gallons per year. Brazil's ethanol production cost is $1.10 per gallon. Estimates are that oil could drop to $35 per barrel and ethanol producers would still make money.

The bottom line is that there is plenty of fuel of a variety of types and over the long term prices will go down. The economist Julian Simon advised: if you find anyone willing to bet that natural resource prices are going up, take him for all you can. His book The Ultimate Resource showed how human ingenuity had kept driving down the price of energy and other natural resources for centuries.