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World’s energy issues not reflected by news soundbites

July 7, 2008

Surprising myself  by making several strong assertions during conversations over the weekend, I realized I’ve been giving some thought to our rising oil and fuel prices and the broader price inflation and economic downturn they are creating.

The situation does not appear to be by intelligent design, as I don’t believe anyone, even oil company execs would agree that it is sustainable.   If you ever played ‘Monopoly’ as a child, or with your children, you realize that more of the fun of the game comes from the free enterprise give and take early in the game, when properties can be acquired and money is traded between players.  The latter phases of the game are perhaps less fun, when a player has prevailed and owns almost all the squares on the board.  Movement of other players is constrained to the point that each roll of the dice no longer provide any hope of recovery, but reflect only that inevitable slide to bankrupcy.  While that may be the point of the boardgame, it is not the way the world works. 

I find the soundbites on the TV particularly aggrevating as the media provides information that leads viewers to perhaps conclusions of dubious validity.  Several of these were evidenced in the opinions of those I spoke with recently.  I’ll enumerate a few here, and welcome those with compelling facts to challenge.

1) Why doesn’t everyone just swith to diesel and run off used french fry oil ?

I’ve seen several feature stories of inventive individuals who converted an old Chevy van and drove accross the country on waste oil.   Well, the issue is the scarcity of the waste oil.   I worked at a particular fast food burger chain in during my senior year of high school.  We had 4 fryers in the restaurant, each held about 5 gallons of oil.  We filtered the oil daily to remove the small bits of french fries that slowly turned brown-black, but only changed the oil once per week.  That would yield about 20 gallons, or maybe enough for one car for a week’s worth of driving.   How many restaurants are there?  Now, how many cars.  In reality this would only work for a handful of people in each community.

2) Why not E85 ?  

Well, we have E85, and the 85% alcohol content provides a lower energy density that the corresponding amount of gasoline, which means that you have to burn more of it to go the same distance.   It is sold at a discount to normal gas today, and is a break even proposition at present.  However, we are using a realatively small amount of it today, and are overlooking the impacts to soil, the feed crops / food stocks, and the ability to absorb crop production short falls due to drought, flooding or other natual disasters.   As it stands, we are pumping a fairly consistent and reliable volume of oil daily.  Just this year in the US, over 10% of the corn crop was wiped out due to flooding in Iowa.   If we were 100% dependent on E85, and lost 10% of the ingredient that makes up 85% of the product we would have a significant shortfall.  The resulting price run up would be catastrophic and there would likely be scarcity – rationing or no availability.

3) It’s a supply and demand problem. 

We need to use less.   Perhaps, but I’ve recently seen behavior in other monopoly commodities that suggest consuming less in decrease demand and increase supply does not necessarily lower the price.  Recent restrictions reduced water usage in a local municipality by 20%, but this led to a revenue shortfall, so the rates were increased to make up the difference.  People used less, and the prices went up.  I think this would be the same in the oil and gas industry.  Why?  These companies are publically traded, and stocks only go up if there is an expecation that earnings will continue to rise, improving the P/E ratio.   If investors believe the company is likely to plateau in earnings, there is no reason to hold the stock – time to sell and move to something else more likely to increase in value.  (I’m discounting investment strategies that short the market and make money on decline)   So, the oil companies will look for ways to grow revenue year over year – this can either be through organic growth of more usage in more markets, or through price increases.  All factors equal, if we use less, we will most likely pay more.

4) We need to end our dependence on foreign oil.  

Well, perhaps, but in a controlled way, and not for the widely held notion that this will reduce prices at the pump.   Let’s take the last point first.   If our nation’s oil and gas industry were run by the government, then perhaps what was pumped here, could be sold here, and the costs of the supply chain controlled to minimize mark up at each phase, from extraction to refining to transport and distribution, to end sales.  In that case, perhaps we could realize benefits from switching to 100% domestic supply.   However, the supply chains are not government controlled, and sell into the prevailing market, which means that the oil companies would sell into the markets where there is demand, and they can make the most profit.    Why would sell here for $2 gallon when you could get $3, $4, $5 elsewhere?   National security interests could be a legitmate reason to try to secure greater domestic production capacity, but only if the end use of that resource were controlled.

Now let’s look at the other aspect.  What if the nations of the world suddenly developed another energy source, or were somehow able to domestically provide their own oil?  What would the impacts be to many middle eastern countries whose number #1 export and major driver of their GNP is oil?   Suppose their income were to dry up, and they had not developed other methods of producing revenue?    There would likely be social unrest, joblessness, poverty, crime, and open conflict.   These latter scenarios would require large expenditures of humaitarian resources, and perhaps additional military deployments.  By design, those nations whose primary income is from oil will need a transition strategy before either the oil runs out, or dependent nations develop an alternative.   This has to be considered and managed carefully, which is why I don’t believe we could truly end our dependence on foreign oil today, even if we had the means to do so.  

In summary, I’m disappointed that our world is led by politics instead of science, and that the media doesn’t ask or demand the full disclosures in the stories put forth.  I think we are doing ourselves a great disservice with these misleading soundbites being broadcast to the masses.

I’d like to see the end to end oil from the ground to the gas pump supply chain diagramed out.  How could this be re-engineered to have fewer steps and less cost mark up?   I’d like to see a study about the additional electricity required if everyone drove plug in rechargable vehicles for their daily commutes.  Do we have the power generation capacity to support this?  What would be the result of the increased demand in utility pricing?  How would states make up for the revenue that comes from gas taxes?  Would our milage be tracked and taxed on a annualized basis?

Lastly, I see the PR commercials from the oil companies with molecules floating around in the background while an actor in a lab coat tells us about the breakthroughs they are working on for a cleaner and brighter tomorrow.   Is it truly in the interest of these companies to quickly develop an alternative, and what is the motivation to deliver that alternative at the best price possible?  Wouldn’t a startup business, under pressure to get a product to market and establish positive revenue be more likely to deliver in the near term?  What are those companies, and why are they not being reported on and actively featured for public investment?

One Comment leave one →
  1. Garru permalink
    July 10, 2008 12:03 am

    Well said Mark. It seems all things in life are complicated in this modern day and time. It would be interesting to see what energy source the earth population will be using to run vehicles in a century. Dare to guess?

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