The economic problem with energy consumption today is quite singular and clear: high gas prices. These higher gas prices are akin to a tax on every American and drain from our pool of resources to spend, save and invest. Higher gas prices are driven by higher oil prices.
Why focus on petroleum prices and not other energy sources?
Because only petroleum is really going up in price over the long term, and is anywhere from 3 to 5x the price of Natural Gas or Coal (and this relationship is getting worse not better since 2010). Further, U.S. Oil production peaked in 1970 and has been long in decline while the others have seen upsides in domestic supply reducing likelihood of further cost pressures.
Source: U.S. Energy Information Administration / Annual Energy Review 2010
Where is petroleum used?
Below is an excellent (and busy) chart showing how our energy is consumed in the U.S. Instead of going blind, I will just tell you the conclusion. 26% of ALL energy consumption is petroleum used for transportation. Three quarters of petroleum is used for transportation, and virtually all transportation activity runs on petroleum.
Source: U.S. Energy Information Administration / Annual Energy Review 2010
Where does our Petroleum get produced?
As you can see from the chart below, we produce about half of the petroleum we consume, and we import the other half. Of the piece we import, we get a little less than half from OPEC countries and a little more than half from non-OPEC countries like Canada and Mexico.
Source: U.S. Energy Information Administration / Annual Energy Review 2010
What drives the price of Petroleum?
The cause of higher petroleum prices can be debated, but generally part of the discussion in no particular order: weak dollar, contract speculation, Middle East relations, global demand, increased environmental constraints, and reductions in federal drilling permits. I do not intend to argue the each of the causes, just recognize that most have at least some merit and acknowledge that reducing oil prices is the issue we most desperately need to fix. Further, we should latch on to concepts where we have the most control and can make a significant impact.
So, how do we control Petroleum Prices?
First, we should throw out factors unrelated to direct supply and demand that play a role in the price. The weak dollar and Middle East relationship may impact our oil prices, but since they are used to battle things like unemployment and nuclear weapons, they have to be resolved in the context of other problems so I will set them aside.
In order to increase supply we need to quite simply drill more, which is impacted by allowing more drilling on federal lands and offshore. Further, we need to increase supply from friendly nations like Canada (cough, Keystone Pipeline, cough). This shifts our reliance from OPEC generated oil and reduces their pricing power on the world market. While I think these supply improvements should absolutely be pursued, we have a very heavy resistance from the environmental wing and the President to do so. On the whole, I believe we do get a strong net benefit from pursuing these things, but the impact to overall domestic energy supply and thus price is less clear.
The more intriguing solution likely comes from reducing the demand for petroleum. Remember, petroleum's main purpose is for transportation. You cannot convert power plants, heating systems, industrial power, etc away from petroleum because they are already there. YOU MUST CONVERT CARS AND TRUCKS AWAY FROM PETROLEUM TO CHANGE OIL DEMAND. How? Basically, we have 2 options:
1) Convert cars and trucks to electric with batteries and plug them into the wall. I am 100% for this!! With one major exception, we do NOT yet have an economic battery powered solution. So should we just wait until someone develops it and continue to give our left arm at the pump? No.
2) Convert cars and more specifically commercial trucks to Natural Gas. Thanks to the shale gas revolution brought about by "fracking" technology, we are seeing a boom in natural gas production that will increase our supply by 25% over the next 20 years (below). By moving at least partially to natural gas powered transportation for which technology already exists, we can have very significant impact on oil demand.
Source: U.S. Energy Information Administration | Annual Energy Outlook 2012 Early Release Overview
Significantly reducing the demand for foreign oil great reduces the impact of the dollar and our middle east relationship on price. Also, natural gas is has a cleaner carbon footprint than oil, so the environmentalists could actually claim a win (although they hate "fracking", and try very hard to prevent anything except cars powered by dreams and rainbows).
The issue is how we get to natural gas powered vehicles. We have a chicken and egg problem here with the circumstance being that service stations do not want to provide natural gas if no one is driving natural gas cars and people do not want to drive natural gas cars if they cannot fill up anywhere.
I do believe that over time the incentives to convert to natural gas powered cars and truck will take hold just by market forces (oil prices will continue to climb and natural gas prices will continue to fall until it hits critical mass for people to act). However, when you are listening to what policy incentives are being debated to improve our energy position, please listen to who is for utilizing our massive natural gas resources that can help every single American reduce their household expenses. If the government really wants to give a tax break to middle class Americans, find ways to push the natural gas vehicle infrastructure ahead of market forces.
From what I hear, we are waging a war of words and policy in this country over how to best meet energy needs in the face of higher energy prices and hostile energy providers (like Iran). On one side, you will hear fighting for clean and renewable energy alternatives like solar, wind, and battery powered cars, and on the other side you hear support for increased utilization of gas and oil. I have taken the time to explain what a massive opportunity we have to reduce our dependence on foreign oil and greatly lower pump prices.
When you hear arguments from the other side, both to fight oil and gas environmentally, and promote renewable energy solutions, please press for actual data to back up their claims. You will find the environmental argument is much more based on spreading fear than information, and the investments in renewable energy is focused on idealism over trivial things like feasibility and return on taxpayer dollars.
All of the charts and data enclosed are from the Energy Information Administration. I suggest you have a look at their reports, it is full of great info on the US Energy situation.
9 comments:
Being involved in the arena of education, I feel the role of devil's advocate is beneficial (even if I actually agree with that which is being debated), so let's be philosophical and/ or theoretical for a second:
Does drilling more guarantee to lower gas prices? Although I don't have them que'ed up, I have seen "research results" that "prove" drilling for more oil will neither increase or reduce oil prices. (Common sense would say that if we, as a country, own the oil, then the price of it would decrease. Devil's advocate doesn't have common sense, though). Is the EIA that you referenced above have a political agenda? That would help to bias their results.
Converting reliance from petroleum to something else (natural gas or electricity) seems too liberally-minded - won't this method just transfer reliance on one limited, natural resource to another (natural gas) or something that can be difficult to create and provide in a larger quantity than we already are doing (electricity)?
Cars powered by dreams and rainbows would be awesome, by the way, except if they were powered by my dreams, then they would be powered by talking lizards with bow-ties who are trying to sell me roof shingles.
All things considered, gas is now expensive (used to not be so much), so the market surely will push an alternative to the front. Perhaps the only questions are "in what form?" and "how soon?" And remember, dream-powered cars may prove cheap but dangerous considering the beholder.
Hey Coby, great response.
First, I think the EIA is a government agency, and I mainly used their data, all the opinions are my own. I do not think they are terribly politically biased, but their data jives with most of the other sources I have seen.
I do NOT believe that drilling alone is a solution to our problems, but lets not kid ourselves, all things being equal more oil supply will bring down prices.
I take your point on moving from one limited resource to another, but if you just look at the reality, our oil supply is stagnant while our natural gas supply is and will continue to boom for many years. I see no issue with moving at least partially to natural gas powered engines in autos for 25 years while the guys developing electric cars (also indirectly running on nat gas powered electricity) perfect their craft.
Also, lets be clear, the nat gas boom is in America! That cannot be understated. Oil supply is dominated by world markets and world problems. Not very reliable.
Your last point is fantastic. Yes the market will push out an alternative at a certain point, but since we are working with limited natural resources here, the "in what form" and "how soon" will be influenced by our elected officials.
I think they should be focused on supporting a nat gas transportation alternative over spending on solar and wind and other very limited and costly alternatives. Even if we have to eventually get there, the nat gas boom can buy our country a lot more time to develop the long term answer.
Well-stated retort. Although maybe too simplistic an analogy, I would rather rely on you for something important (someone with possibly a genuine interest in the quality of the outcome) than a stranger (who has the possibility of not caring of the outcome). Surely an ultimate goal of any country's government - especially our capitalistic one - is to strive to cut reliances from ANYTHING we can't control to some extent, and have our own product coveted by all others. I would think, in the most capitalistic society on Earth, that would be the desired end game, even if it isn't realistic. Reducing foreign oil need is the first step; it can't come fast enough.
The price of Gasoline is a main problem for consumers; the national average is now $3.94 /Gallon up from $3.26 on January 1.
However the price of natural gas dropped to a new low of $1.99 per MMBTU or Million BTU’s, last week.
You should (probably do) know that 1 MMBTU can translate to 6-7 Gallons of Diesel fuel or Gasoline.
Of course that is before any sales or excise taxes. And that would change the price...
Combined Federal and state taxes on Gasoline are 46.4 cents per gallon in Ohio
Combined Federal and state taxes on Diesel fuel are 52.4 cents per gallon in Ohio.
I believe Ohio to be middle of the road on gas tax, but I didn't look that up (yet).
As for electric, wth happens to the prius batteries after the cars are in a junk yard?
peace
That's a great point Ryan. I can't find any super official comparisons of the price of CNG gallon equivalent to gasoline (in my limited effort), but I have found some estimations that would put it a little under HALF at today's prices. (i.e. about 1.75 vs 3.80). That is huge savings.
Thought of this blog when I read this today:
http://tech.fortune.cnn.com/2012/04/17/yergin-gas-solar-wind/?iid=HP_LN&hpt=hp_t1
Thanks Coby, that is a informative article. I thought it was telling when Yergin hinted that Nat Gas would be the key electricity supplier and the interviewer intimated that would not make environmentalists very happy. Even though Nat Gas is cleaner than oil or coal, some would rather forgo the short term automatic environmental win to continue to hunt for a long term renewable option. Its crazy.
I would think that intra city buses and cabs would be naturals to convert to gas. You'd only need a few nat gas stations and most if not all sizeable cities have natural gas pipelines going into them I believe.
Hey Doug,
I think those are main targets for conversion. These transit systems also typically have hubs for maintenance where they can setup refill stations. Helps them solve the chicken and egg problem easier.
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