Arnold Kling  

Energy Price Outlook

The Budget Debate... Omniscient Voyeur...

Are high oil prices a temporary spike, caused by the evil oil cartel? Or are they a reflection of dwindling oil supplies?

I'd like to hear from Lynne Kiesling on this. Meanwhile, here are my hunches.

First of all, I do not believe in the power of cartels to restrict supply. If the Saudis and others are not increasing their oil production, then the most likely explanation is that there is no inexpensive way for them to do so. Randall Parker reminded me of what he wrote earlier this year.

At a February 24 2004 symposium hosted by the Center for Strategic & International Studies energy industry investment banker Matthew W. Simmons presented a skeptical analysis of official Saudi Arabian oil reserve claims. A couple of Saudi Aramco employees argued for Saudi estimates. If Simmons is correct then the biggest oil field in Saudi Arabia may already be mostly depleted and the beginning of the decline of oil production in Saudi Arabia may happen decades sooner than conventional wisdom expects.

The bearish view is that we are consuming oil faster than we are finding new oil, so that the pressure on the price is going to be upward. My instinct is to take that view.

In the long run, Parker and I agree that the price of energy is going to be driven by the cost of oil substitutes, such as nuclear power and solar power. Those costs are coming down over time, thanks to more powerful computers and new developments in materials science. In a recent post on nuclear power, he writes

So let us suppose the reactors would cost $1 billion each. Well, that is only $1 trillion to build 1,000 of them.

Put that $1 trillion in perspective. The US burns about 20 million barrels of oil per day which at $50 per barrel is $1 billion per day or 364 billion per year. Though much of that is not for cars. Still, is that $1 trillion affordable if we really needed to switch to nuclear? The United States has a $11 trillion dollar a year economy. For a cost equalling slightly more than one month's economic production we could drastically cut our use of fossil fuels. So when people say we have no choice but to use fossil fuels, well, that just isn't true.

Of course, 1000 nuclear power plants, in a scenario where they are used to produce hydrogen fuel for automobiles, would not reduce our use of oil one bit if the cost of running cars on hydrogen were still higher than running them on oil. But as the price of oil rises, at some point ($100 a barrel? $150 a barrel?) it makes hydrogen power economical.

In some ways, I think that the worst thing that could happen to the energy market in the United States would be another collapse of oil prices. If the price of oil stays above $40 a barrel long enough to convince investors that the change is permanent, then that will stimulate more development of alternative fuel sources.

My picture of the energy market is that prices will rise for several years, but then gradually fall as some research projects start to pay off.

For Discussion. Fifteen years from now, do you think that energy costs will be higher or lower than they are today?

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The author at Tex the Pontificator in a related article titled Energy Costs 15 Years Out writes:
    Arnold Kling's habit is to post topics for discussion. A question he has recently posted is: Fifteen years from now, do you think that energy costs will be higher or lower than they are today? [Tracked on October 17, 2004 2:26 PM]
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shamus writes:

Energy costs will be lower. The reason that oil is the de facto standard is because it's cheap. Once it stops being cheap, alternatives will emrge. Innovation and technology will be brought to bear, and an economical alternative to oil will be developed.

Fazal Majid writes:

You don't necessarily have to ship by pipeline all the hydrogen generated by nuclear power plants. One of the problem with nuclear power is that power generation is constant throughout the day, when demand fluctuates during the day. Storing the excess energy at night and using it during the daytime is a big challenge.

France, which gets 3/4 of its electricity from nuclear, actually uses dams as power reservoirs - at night, electricity from nuclear plants is used to pump water uphill, so it can power the dam's generators during peak hours. Hydrogen tanks on site could achieve the same effect.

Another factor to consider in reducing the cost of nuclear power is standardization. Almost every nuclear plant in the US is unique, and thus there are no economies of scale. This is one area where the market left to itself tends to fail.

Jim writes:

I think the current price of oil is driving a lot of oil development in new places that previously were uneconomical to recover.... for example the canadian tar sands are of the size of saudi's reported reserves; there are a number of very deep water projects such as in the gulf of mexico; development of more conventional fields in iraq, russia, caspian sea. given these new sources... we will have plenty of oil in the short-medium term, and the price might even drop out of the market to something like $15/bl. The higher cost of recovery will let the next plateau be around $25 - 35/bl in fifteen years.

more of an impact will be india/china: considering that adding u.s. + china + india populations together, u.s. citizens are only about 10%..... we've got a lot more demand side uncertainty than supply side in 15 years.

and finally new technologies must be considered (as you mention in your post - wind/nuclear/solar) but more immediate impact is hybrid technology. taking some very rough numbers here based on the honda accord hybrid 30 mpg vs. 20 mpg city mileage (with more power for +$2500).... let's assume a 50% increase in fuel efficiency in u.s. in 15 years (ok, this requires politicians to collectively remove their heads from their rectums) assuming u.s. uses .25 of world oil, half of which goes to cars (which are then using 2/3 the oil previously consumed) = .25 * .5 * .33 = 4.13% reduction in world oil consumption - that's a big move in such a market.

my final analysis from my couch... new technologies and new markets are somewhat of a wash --> steadily increasing demand matched with new supplies that are more expensive to recover leading to a higher average price but lower than today's short term price spikes.... call it $35/bl.

George writes:

I wonder what Julian Simon would say about the current energy situation. I happened to be able to sit in on a briefing in 1988 at OPEC Hq. in Vienna, Austria. Our briefer noted the oil shocks of the 1970s and flatly stated that OPEC would never attempt to do that again not only for the obvious reasons economists usually cite, but also because higher prices trained the oil consumers to use the product much more efficiently than before.

Lawrance George Lux writes:

Here is the direction I see Energy will go in in the future:
1) The major failing in nuclear power is the concentration on building high-level generation facilities. We should be using CAD to design fuel rods which cannot explode, meltdown, or suffer intrinsic damage with loss of coolant. We should use the vast collection of nuclear waste materials to build the new fuel cells, and design cheap nuclear plants (less than $10m) to generate power for a small town level (Suburb for Our traffic chasers). One Thousand plants costing a trillion dollars is not the answer. Failsafe, by construction and fuel, plants of 25000 in number is the answer.
2) Liquid fuels can be synthetically designed from carbon waste on the surface, leaving Oil deposits for lubricants.
3) The major problem of current Energy plans is Everyone thinks in the Box, wanting highly-Capitalized, highly-paid minimal labor forces. Three Hundred dollar Solar panels on every roof could fulfill all energy needs of Households during Daylight hours, maintained by a low-Wage Labor force numbering an additional Two million laborers. They could do this at prices competitive with $50 per barrel Oil, most certainly with $70/barrel Oil.

My perdiction of Energy pricing is the Percentage cost will be the same as in 1975, but People will have to remove their heads from their posterior. lgl

Bob Dobalina writes:

Three Hundred dollar Solar panels on every roof could fulfill all energy needs of Households during Daylight hours

That's a prediction, right?

Robert Schwartz writes:

If you are old enough, you start to believe that if history doesn't repeat itself, it stutters.

In 1979 Oil prices were spiking for the second time in the decade of the 1970s and Jimmy Carter gave his famous Malaise speech and declared that the energy crisis was the Moral Equivalent Of War (meow).

I spent good money on a book about energy policy by a bunch of wonks from Harvard Business School: Robert Stobaugh and Daniel Yergin, Eds., Energy Future: Report of the Energy Project at the Harvard Business School (New York: Random House, 1979); which confidently asserted that oil was headed straight for $100/bbl (about $225 in 2004 money). Of course, the bubble burst and oil went down for most of the next 23 years.

I don't know why oil is high now and I do not know where it will go in the future. The Hulbert peak people are back in full force, but we will not know if they are right until after there is a sustained decline in discovery and production.

OTOH, the Dollar has been weak and the renminbi is not propely traded. If the Fed tightens up the Dollar and China starts to allow RMB trading, currency factors could drop the price oil.

I have read, but do not have the time to track down references, that current technology can manufacture gasoline from coal at $35/bbl. This not new technology. The Germans used it in WWII. There are other sources of carbon and hydrocarbons in North America such as the Alberta Tar Sands, The Wyoming Oil Shales, and the Offshore Methane Hydrates, all of these can be accessed for some finite price. So there is a very reasonable ceiling on long term energy prices.

But, and this is the biggest But of all. This is not a technological problem.Technology is a McGuffin:

The McGuffin Delusion arises when someone argues that an instance of technology, and not the individual who controls the technology, represents the source of a problem. I think this delusion shows up in a lot of technology-related political discussions.

I named it after Alfred Hitchock's description of his plot device, a McGuffin, that every character in the story searches for believing it will solve their problem. In Hitchock's movies, however, the real issues are the relationships between people, not the physical objects they seek.

Nuclear technology is well proven technology as Arnold points out, France relies on it very heavily. So does Japan. But, I can assure you that if anyone proposed a major push for nuclear power plants in the United States, there would be a fire storm of political opposition. Just look at the years that it has taken to open the Yucca Mountain waste depository.

Another example is the amount of opposition that wind power has attracted. Now I personally do not think that wind power is terribly attractive economically, but you have to admit that it does not produce much in the way of waste products. There were a couple of major articles in the Wall Street Journal on Thursday October 10/14/2004. (Sorry no URL Subscribers only). Not Just Tilting Anymore Higher Fuel Costs, Tax Credits, Better Technology Whip Up Hopes for Wind Power Again, By REBECCA SMITH Staff Reporter of THE WALL STREET JOURNAL October 14, 2004; Page B1 and Plans for Huge Wind Turbines Jolt Kansans By JIM CARLTON Staff Reporter of THE WALL STREET JOURNAL October 14, 2004; Page B1.

The first article says that modern wind turbines can produce electricity for about 2.5 cents to four cents a kilowatt hour, including government subsidies of 1.8 cents, so the biggest turbines compete effectively against modern natural-gas-fired power plants, though they won't run as many hours of the day due to the variability of wind. Assuming natural gas at $6 per million British thermal units [close to current market price], a kilowatt hour of electricity from a newly built gas-fired plant costs at least 5.5 cents a kilowatt hour, including both fuel and capital costs.

The second article says that:

Across the Kansas Flint Hills, farmers and ranchers are up in arms over plans by wind developers to erect hundreds of spinning turbines astride hills and ridges that encompass the largest expanse of tallgrass prairie left in North America. Situated between Kansas City and Wichita, the Flint Hills are a weekend sanctuary for many city folks, an oasis of untilled land in the Midwestern Wheat Belt.

The hills have remained mostly untilled because the soil lies over rough limestone and flint. When Houston-based Zilkha Renewable Energy in 2001 proposed putting up a wind farm within view of their ranch, for instance, Jacque and Steve Sundgren organized two dozen neighbors to file petitions with local Butler County officials to block the project. The Sundgrens say they also were concerned that the surrounding prairie would be carved up by roads and transmission lines and that habitat would be reduced for the native prairie chickens their family has hunted for the past half century. "I agree this is a prime choice for a wind farm," says the 51-year-old Mrs. Sundgren. "But they can build them someplace else."

Zilkha withdrew its proposal after the county delayed its review of the project in the face of the protest. In neighboring Chase County, Ms. Koger says she was among eight other landowners rejecting FPL's proposal to put up a wind farm on their properties.

Farther north, in Wabaunsee County, another group of about nine landowners turned down a proposal for a wind farm by JW Prairie Windpower, a subsidiary of Juwi, an international renewable-energy company in Germany. As many as 100 local residents crammed into monthly meetings of the Wabaunsee County planning commission for 18 months to protest wind-farm plans there, prompting the county to institute a local ban on giant wind turbines this past summer.

JW Prairie officials say they were surprised at the opposition, having secured commitments for wind-turbine easements from some two dozen landowners in the county. They also say the part of the Flint Hills they selected had been plowed over in the past and so wasn't as important as more pristine areas. "In picking our site, we tried to pick the least controversial," says Jennifer States, managing director of JW Prairie, Lawrence, Kan. . .

Kansas Gov. Kathleen Sebelius, a Democrat, last December asked the wind developers to use "restraint" as she assembled a task force to assess the situation. That put a halt to most projects. The task force has recommended keeping all large wind turbines out of the Flint Hills, while allowing them in areas not considered sensitive, says Lee Allison, chairman of the governor's energy council. The governor is expected to make a decision on which option to push by the end of the year. . .

Ask yourself, If it is politically impossible to build wind machines on unfarmable land in sparsely populated rural Kansas, how will we be able to build nuclear power plants anywhere? or coal to gasoline plants, or liquid natural gas plants? I think the political problems far exceed the economic or technological problems.

摩托车配件 writes:

thanks ,Arnold

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