Showing posts with label drill. Show all posts
Showing posts with label drill. Show all posts

Tuesday, June 22, 2010

Is there an alternative to oil?





In the wake of BP’s disastrous oil spill in the Gulf of Mexico, many politicians and environmentalists are renewing calls for alternate energy and electric cars to relieve the United States from our dependence on foreign oil. Energy independence would have many advantages, from decreasing pollution to depriving terrorist-supporting Arab states of revenue. Even without environmental considerations, the high price of gasoline, especially for summer road trips, gives many car owners the urge for a cheaper alternative, but is a short-term transition to other sources of energy realistic?

The journey away from oil began in earnest a few years ago with the introduction of the Toyota Prius, the first popular hybrid auto. The Prius combines a gasoline-powered engine and two electric motors. The gasoline engine powers the car for highway driving and the electric motors. The car often runs on battery power with the gasoline engine switched off.

Another popular alternative auto is the Smart Car. This two-seater is a product of Daimler and is known for its fuel economy. The tiny car is unique on American streets. Its small size and distinctive round shape make it stand out. One red Smart Car seen around my home town of Villa Rica, Georgia has a vanity license plate that reads “TMATER.” The Smart Car is powered by a traditional gasoline engine.

There are problems with these new cars. One problem is that although they do offer high gas mileage, fuel economy is only marginally better than traditional compact cars. The Prius advertises a fuel economy of 51 mpg in the city and 48 on the highway (http://bit.ly/9Luzbf ). The Smart Car reports 33 mpg in the city and 40 mpg on the highway (http://bit.ly/c0FRsJ ). In contrast, a new traditional compact car such as the Ford Fiesta measures in 29 mpg in the city and 40 on the highway (http://bit.ly/bY0kNs ).

For this marginally better fuel economy, the car buyer must pay a premium. MSRP for the Prius is between $21,000 and $28,000 (http://bit.ly/cOs1Qn ). The Ford Fiesta, a car of equivalent size to the Prius, has an MSRP of $13,000 to $17,000 (http://bit.ly/cjOnQI ), almost $10,000 less. The Smart Car has approximately the same price as the Fiesta (http://bit.ly/ctZ3YR ), but at half the size. It would take years or thousands of miles to pay for the increased cost of the car in fuel savings. Of course, if gas prices increase sharply, the math would shift in favor of the Prius and Smart Car.

These new cars are also clearly not designed with large families in mind. The Prius and the Smart Car are practical for commuters, but not people who travel with children and the assorted paraphernalia necessary for a family trip. There are a variety of hybrid SUVs on the market, but again there is a tradeoff. A premium in price is added to an already expensive vehicle in exchange for modest increases in fuel economy.

The prospect of completely electric cars would face the same problems as well as additional ones. When Chevrolet’s corporate officers came to congress for a bailout, they touted the upcoming release of the Chevy Volt, a totally electric car. One obvious problem with the Volt is that its battery power will only take you 40 miles (http://bit.ly/bPC2l2 ). If you need to go further, a gasoline engine takes over.

For many commuters, such as those driving to Atlanta from outlying suburbs, forty miles is close to a one-way commute. To take full advantage of the Volt, they would have to charge the car at night at home before driving to work. Once at the office, they would have to find an outlet to plug in the car to let it charge for the trip home.

Additionally, people without a garage may have trouble finding a place to plug in their Volt. Although it is capable of charging from a common household 120-volt outlet, outside outlets are not common at many apartments. Even at a house without a garage, it might be difficult to find an outlet that won’t require the use of very long extension cord. The exact price of a Chevy Volt hasn’t been released, but Chevrolet has indicated that the car will cost over $30,000 (http://bit.ly/9AilVS ). This is even after tax credits are taken into account.

Another electric car with better performance is the Tesla Model S. Tesla Motors is partnering with Toyota to produce a high performance electric roadster. The Tesla is a two seat open top sports car that accelerates from 0-60 mph in less than 4 seconds (http://bit.ly/9AnZ2d ). Its estimated 245 mile range is six times that of the Volt. Nevertheless, after 245 miles, plan on a long lunch. It takes three and a half hours to recharge. This is much more inconvenient than pulling into a gas station for a quick fill-up. The Tesla’s price tag is also impressive at $100,000. For those on a budget, you can also lease a Tesla for just over $1,500 per month. (For more information, see www.teslamotors.com.)

The Volt and the Tesla share common disadvantages in price and range, but what makes them really impractical is their small size. Like the Prius and the Smart Car, the Volt and Tesla are meant for commuters. A successful family electric car will must have room for a family. To be widely accepted, electric vehicles will not only have to have the range to run errands around town, they will have to have the seating and cargo capacity of a minivan or an SUV.

Even if such an electric vehicle were available today, it would be years before we could transition completely away from gasoline powered cars. The Bureau of Transportation Statistics estimates that there are more than 135 million passenger autos in the US (http://bit.ly/9fL3uR ). Many, if not most, of the owners of these cars would not want to incur a mortgage-sized car payment for a new electric car. The market for used electric cars is thus far nonexistent.

Consumer demands aren’t the only limits for the growth of the electric car market. At this point, the electrical infrastructure of the US is not prepared to handle the power demands of a transition to electric cars. While electricity is cheaper than oil at this point, increased demand for electricity would drive up its price. This is especially true if congress passes a cap-and-trade energy tax since much of our current electricity is generated by coal, one of the cheapest sources of electricity.

New and alternative sources of electricity such as solar and ocean wave capture are expensive when compared to coal, natural gas, and nuclear generated electricity. The cost of wind energy has decreased in recent years, but these alternative sources of energy face the problem of intermittent wind and sunshine. To be practical, alternative energy sources would have to include a back-up storage system for when the wind is calm or clouds block the sun. At this point, massive batteries or some other technology that can back up large scale alternative energy sources have not been developed.

A final alternative to oil is to use ethanol in gasoline powered autos. There are several problems associated with ethanol use however. For example, when the government increased the mandated amount of ethanol production in 2007, it caused a worldwide spike in food prices the next year (http://n.pr/bbJPHL ). Even if the total US corn crop was used for ethanol production, it would only account for 12% of American gasoline requirements (http://bit.ly/9zhJIE ). Additionally, ethanol can damage engines.

Another newly cost-effective technology converts coal into gasoline. The Germans developed a process to transform coal into gasoline in response to fuel shortages in WWII. Since then, low oil prices have made the process too expensive to compete with oil-based gasoline until recently. Coal-based gasoline does not resolve concerns about pollution and carbon emissions. Similarly, as oil and gasoline prices rise, new advances in biofuels and biomass-based gasoline may become more practical.

Although there is already progress with new technology and even more advances are on the horizon, the United States, along with the rest of the world, remains firmly in the grasp of oil. For the foreseeable future, we will need oil rigs to provide the fuel for our national economy.

Sources:

http://www.toyota.com/compare/?modelCode=prius#h_overview
http://www.greencar.com/articles/smart-car-offers-drivers-new-high-mpg-option-top-crash-rating.php
http://www.ford.com/about-ford/news-announcements/press-releases/press-releases-detail/pr-allnew-ford-fiesta-delivers-40-mpg-32663
http://consumerguideauto.howstuffworks.com/2010-toyota-prius.htm
http://www.hybridsuv.com/
http://www.chevrolet.com/pages/open/default/future/volt.do?seo=goo_|_2009_Chevy_Awareness_|_IMG_Chevy_Volt_Phase_2_Branded_|_Chevy_Volt_|_chevy_volt
http://www.greencarreports.com/blog/1041733_update-low-thirties-2011-chevrolet-volt-price-is-after-tax-credit
http://www.bts.gov/publications/national_transportation_statistics/html/table_01_11.html
http://en.wikipedia.org/wiki/Relative_cost_of_electricity_generated_by_different_sources
http://en.wikipedia.org/wiki/Electricity_generation
http://e360.yale.edu/content/feature.msp?id=2170
http://www.npr.org/templates/story/story.php?storyId=93293391
http://www.usatoday.com/tech/news/2006-07-10-ethanol-study_x.htm
http://environmental-engineering.suite101.com/article.cfm/coal_gasification
http://en.wikipedia.org/wiki/Biogasoline

Fort Myers, FL
June 19, 2010

Photo Credit:
In the wake of BP’s disastrous oil spill in the Gulf of Mexico, many politicians and environmentalists are renewing calls for alternate energy and electric cars to relieve the United States from our dependence on foreign oil. Energy independence would have many advantages, from decreasing pollution to depriving terrorist-supporting Arab states of revenue. Even without environmental considerations, the high price of gasoline, especially for summer road trips, gives many car owners the urge for a cheaper alternative, but is a short-term transition to other sources of energy realistic?

The journey away from oil began in earnest a few years ago with the introduction of the Toyota Prius, the first popular hybrid auto. The Prius combines a gasoline-powered engine and two electric motors. The gasoline engine powers the car for highway driving and the electric motors. The car often runs on battery power with the gasoline engine switched off.

Another popular alternative auto is the Smart Car. This two-seater is a product of Daimler and is known for its fuel economy. The tiny car is unique on American streets. Its small size and distinctive round shape make it stand out. One red Smart Car seen around my home town of Villa Rica, Georgia has a vanity license plate that reads “TMATER.” The Smart Car is powered by a traditional gasoline engine.

There are problems with these new cars. One problem is that although they do offer high gas mileage, fuel economy is only marginally better than traditional compact cars. The Prius advertises a fuel economy of 51 mpg in the city and 48 on the highway (http://bit.ly/9Luzbf ). The Smart Car reports 33 mpg in the city and 40 mpg on the highway (http://bit.ly/c0FRsJ ). In contrast, a new traditional compact car such as the Ford Fiesta measures in 29 mpg in the city and 40 on the highway (http://bit.ly/bY0kNs ).

For this marginally better fuel economy, the car buyer must pay a premium. MSRP for the Prius is between $21,000 and $28,000 (http://bit.ly/cOs1Qn ). The Ford Fiesta, a car of equivalent size to the Prius, has an MSRP of $13,000 to $17,000 (http://bit.ly/cjOnQI ), almost $10,000 less. The Smart Car has approximately the same price as the Fiesta (http://bit.ly/ctZ3YR ), but at half the size. It would take years or thousands of miles to pay for the increased cost of the car in fuel savings. Of course, if gas prices increase sharply, the math would shift in favor of the Prius and Smart Car.

These new cars are also clearly not designed with large families in mind. The Prius and the Smart Car are practical for commuters, but not people who travel with children and the assorted paraphernalia necessary for a family trip. There are a variety of hybrid SUVs on the market, but again there is a tradeoff. A premium in price is added to an already expensive vehicle in exchange for modest increases in fuel economy.

The prospect of completely electric cars would face the same problems as well as additional ones. When Chevrolet’s corporate officers came to congress for a bailout, they touted the upcoming release of the Chevy Volt, a totally electric car. One obvious problem with the Volt is that its battery power will only take you 40 miles (http://bit.ly/bPC2l2 ). If you need to go further, a gasoline engine takes over.

For many commuters, such as those driving to Atlanta from outlying suburbs, forty miles is close to a one-way commute. To take full advantage of the Volt, they would have to charge the car at night at home before driving to work. Once at the office, they would have to find an outlet to plug in the car to let it charge for the trip home.

Additionally, people without a garage may have trouble finding a place to plug in their Volt. Although it is capable of charging from a common household 120-volt outlet, outside outlets are not common at many apartments. Even at a house without a garage, it might be difficult to find an outlet that won’t require the use of very long extension cord. The exact price of a Chevy Volt hasn’t been released, but Chevrolet has indicated that the car will cost over $30,000 (http://bit.ly/9AilVS ). This is even after tax credits are taken into account.

Another electric car with better performance is the Tesla Model S. Tesla Motors is partnering with Toyota to produce a high performance electric roadster. The Tesla is a two seat open top sports car that accelerates from 0-60 mph in less than 4 seconds (http://bit.ly/9AnZ2d ). Its estimated 245 mile range is six times that of the Volt. Nevertheless, after 245 miles, plan on a long lunch. It takes three and a half hours to recharge. This is much more inconvenient than pulling into a gas station for a quick fill-up. The Tesla’s price tag is also impressive at $100,000. For those on a budget, you can also lease a Tesla for just over $1,500 per month. (For more information, see www.teslamotors.com.)

The Volt and the Tesla share common disadvantages in price and range, but what makes them really impractical is their small size. Like the Prius and the Smart Car, the Volt and Tesla are meant for commuters. A successful family electric car will must have room for a family. To be widely accepted, electric vehicles will not only have to have the range to run errands around town, they will have to have the seating and cargo capacity of a minivan or an SUV.

Even if such an electric vehicle were available today, it would be years before we could transition completely away from gasoline powered cars. The Bureau of Transportation Statistics estimates that there are more than 135 million passenger autos in the US (http://bit.ly/9fL3uR ). Many, if not most, of the owners of these cars would not want to incur a mortgage-sized car payment for a new electric car. The market for used electric cars is thus far nonexistent.

Consumer demands aren’t the only limits for the growth of the electric car market. At this point, the electrical infrastructure of the US is not prepared to handle the power demands of a transition to electric cars. While electricity is cheaper than oil at this point, increased demand for electricity would drive up its price. This is especially true if congress passes a cap-and-trade energy tax since much of our current electricity is generated by coal, one of the cheapest sources of electricity.

New and alternative sources of electricity such as solar and ocean wave capture are expensive when compared to coal, natural gas, and nuclear generated electricity. The cost of wind energy has decreased in recent years, but these alternative sources of energy face the problem of intermittent wind and sunshine. To be practical, alternative energy sources would have to include a back-up storage system for when the wind is calm or clouds block the sun. At this point, massive batteries or some other technology that can back up large scale alternative energy sources have not been developed.

A final alternative to oil is to use ethanol in gasoline powered autos. There are several problems associated with ethanol use however. For example, when the government increased the mandated amount of ethanol production in 2007, it caused a worldwide spike in food prices the next year (http://n.pr/bbJPHL ). Even if the total US corn crop was used for ethanol production, it would only account for 12% of American gasoline requirements (http://bit.ly/9zhJIE ). Additionally, ethanol can damage engines.

Another newly cost-effective technology converts coal into gasoline. The Germans developed a process to transform coal into gasoline in response to fuel shortages in WWII. Since then, low oil prices have made the process too expensive to compete with oil-based gasoline until recently. Coal-based gasoline does not resolve concerns about pollution and carbon emissions. Similarly, as oil and gasoline prices rise, new advances in biofuels and biomass-based gasoline may become more practical.

Although there is already progress with new technology and even more advances are on the horizon, the United States, along with the rest of the world, remains firmly in the grasp of oil. For the foreseeable future, we will need oil rigs to provide the fuel for our national economy.

Sources:

http://www.toyota.com/compare/?modelCode=prius#h_overview
http://www.greencar.com/articles/smart-car-offers-drivers-new-high-mpg-option-top-crash-rating.php
http://www.ford.com/about-ford/news-announcements/press-releases/press-releases-detail/pr-allnew-ford-fiesta-delivers-40-mpg-32663
http://consumerguideauto.howstuffworks.com/2010-toyota-prius.htm
http://www.hybridsuv.com/
http://www.chevrolet.com/pages/open/default/future/volt.do?seo=goo_|_2009_Chevy_Awareness_|_IMG_Chevy_Volt_Phase_2_Branded_|_Chevy_Volt_|_chevy_volt
http://www.greencarreports.com/blog/1041733_update-low-thirties-2011-chevrolet-volt-price-is-after-tax-credit
http://www.bts.gov/publications/national_transportation_statistics/html/table_01_11.html
http://en.wikipedia.org/wiki/Relative_cost_of_electricity_generated_by_different_sources
http://en.wikipedia.org/wiki/Electricity_generation
http://e360.yale.edu/content/feature.msp?id=2170
http://www.npr.org/templates/story/story.php?storyId=93293391
http://www.usatoday.com/tech/news/2006-07-10-ethanol-study_x.htm
http://environmental-engineering.suite101.com/article.cfm/coal_gasification
http://en.wikipedia.org/wiki/Biogasoline

Fort Myers, FL
June 19,

Photo Credit:
m_bartosch
http://www.freedigitalphotos.net/images/view_photog.php?photogid=681

Monday, September 15, 2008

The Economics of Oil Prices

This past weekend oil prices shot to near-record highs again after several months of decline. While on a weekend trip to visit the grandparents, we were unpleasantly surprised to see gas prices climbing as quickly as the gas station attendants could change their signs. Even at high prices, many stations were selling completely out of gasoline.

To understand the reason for the fluctuations, we must first see the big picture. Oil prices have been increasing over the last few years for a number of reasons. More demand is one of the most important factors. The United States has been using more oil every year. The demand of other countries is increasing as well. China and India are both becoming industrialized nations. As they industrialize, they use vastly more oil than they did in the past.

Additionally, much of the easily tapped oil has already been drilled. Oil fields are increasingly difficult and expensive to tap. Even nations like Saudi Arabia have already pumped much of their easily accessible reserves. New oil fields are often found far out to sea or in very inhospitable areas, such as the arctic. There are new sources of oil, such as Colorado’s oil shale, but many of these are also more expensive to produce. Many oil-rich areas are also politically unstable, which makes the supply of oil uncertain.

Furthermore, oil prices have also been affected by the weak US dollar over the last few years. When the dollar is weak relative to other currencies, it takes more dollars to pay for the same barrel of oil.

Over the summer, oil prices have been driven down by several factors. First, high oil prices did what global warming alarmists were unable to accomplish: They persuaded people around the world to use less oil. Oil demand declined in the first half of 2008 and is forecast to continue falling in 2009.

Basic economic theory is that as prices rise, demand will fall. This has been true in other oil spikes as well. When oil prices increased sharply in the 1970s and 1980s, they led to economic slowdowns, which, in turn, caused the price of oil to drop. In the 1980s, the price of oil not only dropped, it collapsed and didn’t recover for about twenty years.

The dollar also gained over the summer of 2008. As the dollar grew stronger, the relative price of oil decreased. As the dollar increased in its value, it took fewer dollars to buy each barrel of oil.

A final factor in the oil price decline was President Bush’s decision to repeal the presidential ban on offshore oil drilling in mid-July 2008. Conservative estimates are that there are at least 18 billion barrels of oil off the coasts of the United States that are currently off limits to oil companies. Drilling will still not be allowed unless the congressional ban is allowed to expire, but President Bush sent a clear message to oil producers that the supply of oil might increase dramatically in the next few years. The effect was an almost immediate decline in the price of oil.

Many people place the blame for high oil prices squarely at the feet of the oil companies. While the oil companies once had the ability to set prices, that is no longer true. Most producing countries nationalized their oil fields and facilities in the 1960s and 1970s. They then formed OPEC, a cartel tasked with organizing oil production and stabilizing prices. Currently oil-producing countries set the price for their oil and buyers simply choose whether to buy or not. Given the high demand for oil, usually the choice is to buy regardless of price.

There are few cures for high oil prices. One is to reduce demand. This can be accomplished through alternative energy sources. One of the most practical solutions is to shift to electrical power. Electricity could be supplied cheaply through nuclear, wind, and solar power. All of these energy sources require large capital investments to start, however. Costs to consumers for new cars and home heating systems would also be significant. Conservation is promising way of reducing demand as well.

Increasing oil supplies is the other way to reduce oil prices. Billions of barrels of domestic oil reserves are going unused because of environmentalist-inspired bans on drilling. These oil reserves could be used to buy time to shift to other energy sources. Because much of the pre-production work has already been done, these oil reserves could be brought to market in as little as two years.

Supply could also be increased by new sources of oil. A process to turn coal into gasoline was invented by the Germans in WWII. Since the US has some of the world’s largest reserves of coal, this process holds much promise. Due to large investments for facilities to process the coal, this is not cost effective when oil is cheap, but is being considered now.

A common question is why retail gasoline prices rise faster than oil prices. The answer can be found in how gas stations are supplied. Over the past few years, gas stations have only been making a few cents profit on each gallon of gasoline. When gas prices rise, the station owner knows that his next shipment of gasoline is going to be more expensive. He raises prices so that he will be able to pay for the next shipment of gasoline. If he doesn’t increase the price immediately, he knows that he will lose money.

Conversely, when prices fall, the gas station owner sees an opportunity to make a little more profit for a short time. As he loses customers to gas stations with lower prices, he will eventually have to lower his own prices or be stuck with a large inventory of gasoline.

Last weekend, the run on gas stations had several factors. One is that the newest refinery in the US is over thirty years old. Due to government restrictions and costs, refinery capacity has not kept pace with increasing demand. As a result, US refineries are operating at about 97% capacity. When there is any interruption, such as that caused by Hurricane Ike, there is the possibility of an interruption of supply and a resulting shortage.

Another factor is that the public was panicking. Even though news reports were saying that there was no possibility of a shortage, as prices rose, the word went out among friends and families that it was time to fill up, before prices rose further. This created an artificial surge in demand. As economic law tells us, when demand rises, price follows. As station owners saw that they were going to sell out, it was obvious that it was better for them to sell out at a higher price than a lower one.

This may strike some as price gouging, but it can actually be a good thing. Rising prices prevent hoarding by those who don’t need the product. If someone doesn’t need gas, they won’t pay the higher price. Therefore the gas will be available for someone who does need it and is willing to pay the higher price. If the price stayed low, then hoarders would quickly snap up all available supplies.

Oil prices will probably decline again in the next few weeks, but $100 per barrel oil is likely here to stay. As long as demand remains high and supplies are constrained with no slack available at the production facilities, we should prepare for price spikes every time there is an interruption, whether real or perceived. The only real answers are to reduce demand through conservation and alternative energy sources, while simultaneously boosting supply and production in the short term.

Sources:
The Prize, Daniel Yergin, Simon & Schuster, New York, 1991
http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/demand_text.htm
http://www.dailyreckoning.com.au/future-oil-production/2008/05/22/
http://www.api.org/Newsroom/us_june08_oil_demand.cfm?renderforprint=1
http://www.ogj.com/display_article/339235/7/ONART/none/GenIn/1/IEA-cuts-2008,-2009-oil-demand-forecasts/
http://www.cnn.com/2008/POLITICS/07/14/bush.offshore/index.html