The Gulf Crisis–Beyond Petroleum–A Game Changer?

“US Offshore Drilling is a Good Thing” A few weeks ago, shortly after President Obama announced an expansion of offshore drilling rights, that was the working title of a post I was contemplating for this blog. The premise was that it would take many years before we weaned ourselves from our use of oil, and production of additional domestic oil and gas  would have some impact on overall prices, increase natural gas usage (reduce CO2 emissions), reduce our dependence on foreign energy sources and have a positive impact on our trade balances. While I was fiddling around with this post and enjoying some late season fishing in Argentina instead of writing, along came the  “Black Swan” Gulf disaster.

The disaster is ongoing as it will be for many years to come. Much has been written and will continue to be on the environmental, human, political and economic consequences of this Inevitable Accident, which is the way it should be referred to.  I have my own somewhat disconnected observations, which I will share. trying to see what, if any, good may come out of an event that some are calling a “game changer.” I expect disagreement and dialogue and hope we get some. I hope none of what I have to say approaches the idiocy of one of our Senators who is willing ro repeat again and again that the Gulf incident is not an environmental disaster. Let’s get to some of the observations.

This disaster was inevitable—the Inevitable Accident.  In the continuing search for and production of carbon-based energy sources we keep stepping up the risk, whether that is in a coal mine in Virginia or China, a shale deposit in Pennsylvania, a tanker on the ocean, a LNG terminal or deep wells offshore  anywhere.  The technology becomes more complex, the measure of risk more difficult, and the cost of mitigating risk too high at today’s prices for carbon to be fully recognized and absorbed.  Maybe this disaster was a good thing. I hesitate to say that because of the loss of life and livelihood for those directly impacted. However, the response to it may prevent other similar or worse disasters. Although, most likely, it will simply delay the next more devastating disaster as the risk-taking outpaces the rule-making in the effort to meet the insatiable demand for energy worldwide.  One example of risk-taking outpacing rule-making is the talk of raising the liability cap from $75 million to $10 Billion.  Odds are this “incident” should cost BP well north of $30 Billion. In today’s dollars Exxon-Valdez cost Exxon about $10 Billion. If a major oil company sees its financial risk as “only” $10 Billion, there are lots of risks one can take that have an expected value substantially higher than that.

Whatever the US does in terms of limiting off-shore or on-shore drilling or raising the cost via rules and regulations, it will likely have limited impact on drilling elsewhere. In fact costs may be lower elsewhere as the supply of rigs available rises. Brazil has some heavy duty drilling ahead of it. Its costs will go down. Whatever steps are taken will also likely benefit the bigger companies relative to smaller participants. OPEC must be jumping for joy as well.

I still wonder why we didn’t bring to bear immediately the best engineering and scientific minds in this country, or the world for that matter, to get in front of this disaster. The attitude seemed to be one of “this is BP’s problem.” There was much more time spent on establishing who was at fault than responding to the problem. Certainly, it made it more difficult for BP to shift responsibility technically and financially. But, this had the makings from the beginning of a potential major human and ecological disaster if things did not go well. When a casual suggestion late in the process from our Secretary of Energy provides a solution to a specific problem (gamma rays to analyze the stuck valve) one can just imagine what might have been in a much more organized effort to bring brainpower to the problem. It doesn’t give one much confidence that our response to the next disaster will be any better.

Maybe this increases the odds of further action by the US on climate change legislation and an increase in incentives for alternative energy sources. There are powerful forces opposed to that with several senators as their mouthpieces, but, maybe this is a game changer. I don’t yet see the outrage though. A few people boycotting buying fuel at a BP service station, which only hurts the owners of the station—not BP—but not much more directed anger. A lot of “isn’t it too bad,” as people drive their gasoline guzzlers to and fro, but no real outrage. Why aren’t consumers demanding that the auto companies (the US government in some instances) substantially increase mileage standards and come up with alternative fuel systems?  The boycott should be against new car purchases unless the mpg rating is at least at China’s standard, 35 miles per gallon on its way to 55 or 60 mpg. As I have pointed out before, once we get the fleet to that level we stop buying oil from other countries except Canada and Mexico—and at some point that should end as well.

One could go on with other observations, but the above are some major ones.  The level of outrage needs to rise nationwide, not just in the areas affected, as does the level of responsive and responsible action. Let’s not waste this crisis.  Let’s not wait for the next Inevitable Accident.

Trade Deficits, Energy Independence and, Oh Yes, CO2 Emissions

Our trade deficit with the rest of the world widened in September to $36.5 Billion, more than was expected.  Oil prices, a weak dollar and a rising deficit with China were viewed as the culprits. To the extent the trade deficit widens it reduces the growth of GDP. So economists are lowering their growth rate numbers for the third quarter and shaving numbers for the future as well. With President Obama’s trip to China in the news, journalists and others have jumped on the “undervalued” Chinese currency as a systemic problem that China must correct to solve the US’s trade problems and maybe those of the rest of the world as well.  It is highly unlikely, in my view, that a rise in the value of the yuan would do much beyond shifting the manufacture of some of the goods the Western world is buying from China to other Asian countries. I also think those countries, which already have strong trading relationships with China, would remain within the Chinese supply chain.  Nominally, our trade deficit with China might shrink, but it would rise with the other lower cost countries within the Asian sphere that are increasingly an integrated  part of the new center of manufacturing for the world. Of course, in the short term, deficits would rise as US companies would not easily shift from the established supply chains they have which are working well. Some combination of profit margins falling and prices rising on finished goods would be the more likely result.

So let’s, instead, turn to something that we control that would over time reduce our trade deficit—eliminating imported oil. I wrote about this in my post “Our Mileage Standards Are a Joke,” but let’s do it again with some refinement.  I apologize for all the numbers but we have to deal in facts if we want to get to a solution:

We are still importing close to 10 million barrels of oil a day, about half from OPEC (with Saudi Arabia and Venezuela the biggest), a fourth from Canada and a little more than 10% from Mexico. We have about 240 million cars on the road traveling about 3 trillion miles a year, consuming 4 billion barrels of gasoline or about 11 million barrels per day. At a scrappage rate of 4.5% a year we will have a new fleet of cars on the road in 20 years.  By the way, the current rate of new car sales is about equal to the scrappage rate.  We aren’t adding to the fleet. If we pushed our mileage standards up to get us to 55 miles per gallon on new cars in 20 years (which is where the rest of the world is going already), our usage would only be 5 1/2 million barrels per day on its way down every year after that as continued scrappage eliminated the lower mileage vehicles. Given what we are seeing already from the new start-up car companies and Ford and GM I think we could blow those standards away. I also think scrappage would accelerate if there was a real breakthrough in miles per gallon on a broader class of new cars.  The eVolt gives us a hint of what could happen.

So what about the trade deficit?  Well, the reduction of 5.5 million barrels per day of oil equivalent at, say, $70 per barrel (pick your price) is a $140 Billion annual reduction in imported oil. That is giving no credit for exports of the technology created to meet these mileage standards if the US government truly supports the development of these technologies within this country. The ARRA and DOE grants to new vehicle and battery companies are a start.  It also gives no credit for a possible share gain by US based auto manufacturers as the new technologies grab hold.

And CO2 emissions? A little more problematic a calculation since it depends on what gets one to 55 miles per gallon.  The simple calculation is the elimination of 83 billion gallons of gasoline at 20  pounds of CO2 per gallon or about 830 Megatons of CO2 per year.

Certainly, this is not the only thing we can do to reduce the trade deficit, but it provides a partial solution to existing geopolitical, economic and climate change problems that we don’t really seem to be addressing.