Energy and the Free Market
by Jeff Wright, July 12, 2003
Many libertarians and conservatives say the "free market" will "solve" the problem of fossil fuel depletion. Most Democrats and liberals are completely out of the loop and have no earthly idea as to the realities of energy and no idea whatsoever about a free market. There are many myths and presumptions that are ill-founded when viewed in light of current data and the science that surrounds the data. The other problem is both sides spend too much time reading either economists or environmentalists instead of petroleum geologists and scientists. Economists simply look at the problem as an abstract price and market exercise, and abstract theory doesn't explain how finite certain energy sources are or what the cost of transition and growth will be. Environmentalists don't seem to have much purchase on anything that is actually doable and cannot seem to present a scenario within which mankind ultimately survives in anything but abject poverty circa 1450 AD. Most of them I have written off the map. I'll take the geologists and scientists. Our leaders are failing us and so we must begin to take responsibility for our problem. And it is a biggie.
Fossil fuels production is more a problem in geology, physics, consumption, and politics. Maybe the worst problem at this point is the politics. There is no free market in energy and will not be for the foreseeable future. That's why economics and the "free market" are not going to solve this one. The conservatives will have to figure out they can't solve it as long as the U.S. maintains military and dollar hegemony around the globe. It is also why environmentalists and liberals cannot solve the problem. They don't understand economics and the free market in any form.
We are going to run out of fossil fuels, of this there can be no dispute. Since the first oil well was punched in the ground in Pennsylvania during 1859, we have been depleting a finite global pool of oil and associated products. The difference of opinion is WHEN do we run out and WHAT do we do?
There seems to be a consensus of opinion among petroleum geologists that we are within 5 -7 years (2009-2012) of peak global oil production. We will only know for sure when the data is measured in on the backside. After the Peak, production is expected to decline about 2% a year. Global daily oil consumption is about 75 million barrels/day. That's about 27 billion barrels a year. There is between 1 and 1.3 (from the most optimistic report I read) Trillion ultimately recoverable resource (URR) barrels equivalent. Consumption is rising an average of about 3% a year and may increase depending on how fast the Asian economies start moving. Do the math. The US consumes about 20 million barrels/day. That's 8 million domestic and 12 million imported. The US retains 2.9% of global reserves (that includes all the oil in Alaska, ANWR and all other, folks!). We're moving to the short end of the dipstick. Again, do the math.
The last 25% of the total URR amount becomes much harder to produce as it will involve pumping, negatively affecting the EROEI (Energy Return On Energy Invested) factor for oil. The vast majority of geologists agree that improvements in recovery technology in the next 30-40 years will not alter this figure significantly. The real problem is with consumption.
With China and other countries in Asia rapidly increasing their consumption to raise their standard of living, this shortens the period of complete depletion. It has taken 150 years for the global economy to absorb the first half of the easily obtainable global oil pool. The last half is being consumed 3 times faster and rising. Oil deposits are the most thoroughly explored portion of global geology in mankind's history. We know where 99% of it is now and how much is really left to recover. These factors are significant to what is driving current US foreign and defense policy, as well as the desire to maintain dollar hegemony. These policies are headed for disastrous consequences for the US.
There is no current substitute for petroleum-based chemicals and products in several areas of the transportation system, especially the aircraft industry and for lubricants in the general transportation sector; i.e., you can't fly airplanes on natural gas or coal and provide high-quality lubricants from peanut or vegetable oil. This means an enormously costly shift ahead to rejigger the general transportation infrastructure sector, if it is possible in the given timeframe. It has taken 70+ years to develop the global aviation industry. In the next 50 we may have to turn it over completely.
With 700 million autos in the world and climbing, alternative fuels are going to strain mightily to replace oil. Just wait as every Chinese and Indian family aspires to more than "a chicken in every pot" and wants "a car in every garage." And they can't afford a hybrid or electric alternative (hell, neither can I for that matter).
Hydrogen is likely not an option. The majority of Hydrogen is currently produced using natural gas (see below), plus there is no distribution system for Hydrogen. That means an enormous infrastructure rebuild. Wind? That's a cruel joke. If we produced electric cars run off of wind power would require turbines covering most of the states west of the Mississippi or more. Just calculate the Gigawatts of consumption divided by 500KW/turbine. Natural Gas (see below)? Nuclear? Now there's a good possibility for electrical production, but first we have to exile all the crazy environmentalists to Mars (we really need that cheap space propulsion system, yet ANOTHER REASON to do away with NASA!). However, electrical generation does not solve the transportation and lubricants problem, particularly for aviation and precision manufacturing. Nor does it solve the packaging needs of modern commerce. Plastics come from petroleum. Just think how many products you buy everyday with plastic in them, on them and used to make them.
The other fossil fuels, coal-bed methane (CBM) and natural gas (NG) are also subject to a depletion curve, one that is much steeper. Right now the average NG well in the American and Canadian Rockies produces about 30% less NG over its life than its counterpart 20 years ago. That is why with all the drilling of the last few years the price is still going to skyrocket this year. We are drilling twice as much but between increased consumption, lowered production and faster depletion of new wells, we can't keep up. We do have plenty of coal, but it is only useful to burn for electricity and not much else. BY LAW, the U.S. is bringing many more new electrical generation plants online that can only burn NG. Consequently, we have a big production vs consumption gap that is going to be hard to fill in the next couple years. Methyl Hydrates? The jury and data are still out. Seems promising but may be a bust. Solar? Again, fine for electrical production (although more than 3 times the cost of current generation) but doesn't solve the transportation/lubricants/plastics problem.
Shale oil is probably not going to be a factor. Even though there are potentially tens of billions of barrels recoverable in the U.S., the EROEI factor of shale oil is way too low (0.7) to be useful. It takes too much energy to produce the equivalent energy from shale oil. EROEI is a term that means Energy Return On Energy Invested. Simply stated, it is a complex ratio today that means about the same as in ancient times, that if a tribesman had to spend more time gathering firewood than she could usefully stand in front of it to keep warm and cook food, she needed to find another energy source more easily obtained; i.e., she expended more energy engaging in wood gathering than in energy return for the needed functions. When this problem arose in ancient times, folks just packed up and moved to a new forest. Now we have to find a new planet (dang those NASA people again!). It means, yes, that at some point shale oil could be sold at a profit but the energy it was consuming to produce it actually had a zero or net negative return to energy production. And it is a tremendously dirty production process. It takes more than 100 gallons of water to produce a gallon of shale oil. We import 12 million barrels of oil a day. That's 50 billion gallons of wastewater or approximately 145,000 acre feet (a day!). To replace all of our oil with shale we need to find a large basin to hold hold a new Lake Erie of wastewater. Since most of the shale oil and sands are in the west and Rockies into Canada, that's a huge water problem. Canada is currently experiencing this problem in their Tar Sands project in Alberta.
Another problem with bio-fuels one has to factor in is the nitrate problem. Modern large-scale agriculture runs on petroleum for two basic needs, fuel and lubricants for the equipment and transportation, and fuel to produce fixated nitrates for fertilizer. Nitrates is actually a larger consumer of energy, particularly NG, than the equipment to farm and transport. Our agriculture will collapse into much lower production efficiencies without petroleum and NG-generated nitrates being manufactured to replace nitrates lost in the soil. The fact is that the nitrates industry uses huge amounts of NG to produce their products (80% of the price of that bag of fertilizer you buy for your lawn is the energy cost). Everyone always ignores this problem with "bio-fuels."
However, none of the necessary shifts to ANY alternative will even start until the US stops trying to control the global price for available fuel by keeping it artificially low for the US consumer through use of our economic and military control. This must end so that the supply and demand curve of the actual free market (you know, the one that works as it should) starts to actually apply its force to the American consumer. Most people are going to be mighty shocked by its effect. The US consumer has lived within a cocoon of a distorted energy market for many decades. We may never have a chance to solve the problems in the current distorted system we live in.
But do not despair! There are glimmers of hope on the horizon for things the free market can do for conservation. Will it be enough to be able to effect a stable transition or not? Only our kids will know.
Since I run a diesel truck, I have investigated bio-diesel extensively. The best current option for using bio-diesel is to recover cooking oil from industrial sources and refine it into bio-diesel in an apparatus one can set up fairly inexpensively in one's own garage. Buying a 600 gallon tank to store it in can result in diesel fuel cost for an individual that can be produced for around $1.40 or maybe less, depending on how you value your time in recovering the cooking oil and refining it in your homebrew system.
However, there is no such thing as large-scale biodiesel production. Recycled vegetable oil prices will only stay low as long as bio-diesel recovery is a "Mom and Pop shop" operation. Just like ethanol, the full cost of producing bio-diesel from agricultural sources is more than double the cost of petroleum-base fuel. However, even if the petroleum based product was at it's "real" price, bio-diesel from vegetable oils has a terrible EROEI ratio and would not be able to replace petroleum until the depletion of petroleum is imminent. And more than half of America would have to be nothing but corn or soy fields with no other room to grow other food products. Could you imagine a landscape of bio-diesel and wind power? The whole U.S. would look like Iowa!
The only reason that prices for vegetable oil, soybean and the other available sources is so low is because of the far more limited demand. As long as there is no large-scale market for the production of bio-diesel, the price of recovered vegetable oils etc. is kept low as well by the lack of a market for it. Remember there is an enormous petroleum-based consumption component in any bio-fuel production cycle. That is why ethanol would never fly without the 50-90% subsidy it now receives.
Right now, at current prices, the economics for petroleum diesel improve the cost effectiveness by improving the efficiency of the fuel source. Diesel is about the most under-engineered internal combustion fuel source around. That is changing. Improved engineering is set to invoke vast change on the perception of diesel as an alternative propulsion over gasoline. It has many more advantages for distribution and storage as well. It is far less volatile than gasoline.
Through improved injector, electronic and combustion techniques, diesel will far surpass gasoline in fuel efficiency and emissions reduction in the next five years. In fact, Sturman Engineering (see links) right here in Woodland Park, CO is leading the way with their digital induction injectors. It does not require a wholesale re-engineering of the current technology nor does it require hugely expensive emission control systems as gasoline does. Holy Cow! It's just cost effective!
When their injectors begin production in the 2004 Ford PowerStroke Diesel, a 6.0 L engine will put out the same power and have 30% better fuel efficiency and far lower emissions than the current 7.3 liter P/S. That will improve to virtually zero emissions by 2007 according to Sturman engineers (they hedged on how much further fuel efficiency will take place, but said it would be "significant").
However, even the current technology diesel can get a vast improvement through two sources: after-market propane injectors and control chips. Simply replacing the current factory chip with an aftermarket chip costing $200 in the 7.3 L more than doubles fuel efficiency. I have personally demonstrated this improvement. A factory 7.3L gets about 17-18 mpg. Replacing the chip improved that to 33mpg. In Interstate-only driving the chip can improve that efficiency up to 36 mpg. Why are the factory chips so poor? Talk to the EPA. The way the emissions profile tests are performed on diesel engines mean the chips have to be programmed very fuel-inefficiently to pass their tests. Why does government always become the obstacle? When will we ever learn?
Installing a propane injection system will add 25% more power and 30% better fuel efficiency to a factory vehicle as well. These technologies totally blow the anti-SUV crowd out of the water. At least where diesel technology is involved. The current generation Volkwagen diesel with the Sturman injectors will get 65-70 mpg with virtually zero emissions in the next two years.
These technologies in conjunction with bio-diesel may be workable economically when we pass "Peak Oil" and petroleum starts to run out. However, in today's market petroleum based diesel at $1.50/ gal. or so with these efficienct technologies can rule the economics for many years to come. Veggie oil based bio-diesel will remain a reasonable boutique fuel for those willing to do the work. And the exhaust smells like french fries... er... excuse me, freedom fries. That ought to drive the Obesity patrol and the anti-SUV crowd nuts at the same time!
That is just one example. There are many others. However, the big changes will not occur until we can reform our government and political system. The Republicans and the Democrats have failed and are failing us in dramatic terms. We are going nowhere fast. Soon we will not have the global security or energy to go anywhere. We really need to find a way to get rid of both George Bush, the Wacko environmentalists and their lap dogs at the EPA, and convert Repbulicans and Democrats into some meaningful political infrastructure that allows for our survival and in order for the real free market to actually begin working (what a notion) to save our nation from the calamity on the horizon. Start preparing now!
The environmental effects of all this? We'll discuss that another time. Too many myths to break up there as well in this short space.