Saturday, January 1, 2011

Oil folks warn of $5 per gallon by 2012

A few days ago (11/28/2010), the news reported that Hofmeister, a recent chair of Shell Oil, has warned that
gasoline may get to $5 per gallon by 2012. That's his feeling about the fundamentals, which he tracked as
closely as any of us. Crudely -- that means $2 more per gallon, $84 more per (42-gallon) barrel ... about what
I would expect as well, from the fundamentals, **IF** there is a world economic recovery and **IF** people
continue to expect growing dependency on fossil oil (at least much as they did in 2007, after Bush announced his
effort to "break our addiction to oil").

With full economic recovery (and a bit of growth, and remembering that our stock of cars has not turned over a lot
since then), one would expect US petroleum imports to go back at least to previous peak, in 2007, the year
before the great financial collapse. From,
that's 13.5 million barrels per day. That's about 5 billion barrels per year. If Hoefmeister is right, that's about
$420 billion extra per year, roughly DOUBLING what we are already paying for oil imports.

But with the economic issues we are ALREADY facing, a trillion dollars per year oil bill makes it harder and harder
to imagine how an economic recovery could actually take place. I often wonder how people can make such
a big deal of the flat $2 trillion we "owe" the Chinese, versus the trillion PER YEAR we are talking about,
a lot of it going to OPEC, accompanied by similar large sums from Europe and Japan going to the same place.
And I wonder about how rational it may be to expect to survive on the basis of government or university pensions
if this keeps up. This is reaching the point where it will become personal, for almost all of us.

Some of the bureaucratic modelers would say that $5 sounds "alarmist." But if you look closely at the fundamentals --
believing those modelers is a bit like believing the "pure technicians" on Wall Street, as opposed to the "fundamentalists"
like Buffet. Or worse. Back when I worked at DOE myself, I remember some fascinating irreverent econometric models
they did up at the Policy Office (when oil folks ran DOE). It turns out that the normal people's expectations of future
oil price could be predicted very well as a function of the current price and of the rate of change over something like the last
12 months. Many modelers would tweak their results, to match such expectations, in
order to avoid raising questions and making waves. Also, the DOE budget responded to the price of oil much more than oil consumption did.

Even with google news search, it's not so easy to dig up the details of Hofmeister's position. It seems he may be arguing
for even GREATER permanent subsidies to favor oil over other energy sources. Or he is arguing that abandoning all restrictions
on US offshore oil could change the world oil price in 2012. Neither of these make much sense to me. GM has estimated that at $5
per gallon, cars LIKE today's Volt (i.e. the same technology) become strict economic value propositions for the average consumer.
Should we just shrug our shoulders and let the $5 per gallon come?

Hofmeister's "solution" would basically mean investing huge amounts into offshore drilling in the US starting in 2013,
with new oil -- if significant -- flowing perhaps by 2018. Not enough to resurrect what would be left of the US economy
in his scenario. (Not that Europe would be any better off.)

In fact, there is more decisive evidence today on what the oil industry is thinking. The Financial Times reported
this morning (11/29/2010) that the oil majors are selling off lots of assets (about $60 billion worth reported today) in order to
fund more oil exploration activities. At a minimum, this signals a new conviction that threats to the rise of the
world oil price have been successfully fended off. (FT also had an interesting oped comparing the US to Byzantium --
one of the things I have been thinking about in some detail lately!)

But, in my personal view... it suggests that they are having feelings towards the defense of fossil oil similar to
the feelings I have about sustainability and the survival of this species. Namely -- no matter what the odds against,
a rational person does the best he/she can to maximize the probability of survival, when it's a case of life or death.
But I would argue that survival of the species offers very little credible alternatives, while they really could survive
without fossil oil. In thier case, I would say it's an attitude problem -- a colossal attitude problem, but an attitude problem

A few years ago, we were talking about $75 per barrel short run marginal cost and up for new oil worldwide, presumably
more in the US, and inexorably rising. But Schobert coal liquefaction and credible forms of biocrude clearly offer less
than that already, without the stubborn barriers to expansion and continuation for decades to come. Not just distributors,
but refiners as well, could make more money if the main thrust of the new $60 billion were to support them
rather than offshore drilling. What's more, it's more rational and patriotic for us to support tax incentives for
these new kinds of activities than for stuff which runs us and the oil companies both into the grave.
The new form of Low Carbon Fuel Standards would be helpful in rescuing their situation -- if we really want to rescue them.

To be honest -- if **I** were sitting on top of $60 billion for new energy activities, I would VERY seriously consider
allocating $12 billion of it towards diversifying my portfolio, in a way which leverages the unique strengths
which companies like Exxon gave today, but is well out of the box. I would make a deal with Boeing and
DOD, to get into the launch services market, with costs that 'way undercut folks like SpaceX and
expendable rockets from foreign nations, and yet allow enough revenue from DOD to pay off the cost
of development with interest -- and open the door to a kind of monopoly to provide a new THEN low
cost of electricity. (At $200 per pound to low earth orbit, energy from space does begin to make
economic sense, IF one has the capability to reach markets outside the US.) But this also requires
getting into technical details and cost minimization and decision trees in a way which is quite alien
to the stakeholder culture in this area. It requires a unique blend of political strength and technical competence.

But in fact... the current attitude of "circle the wagons and drill, drill drill 'til we all die" doesn't seem to
offer much opening for that kind of win-win approach.

Once again it poses the question: "Where is the REAL light at the end of the tunnel, for the human species itself?"

Something to meditate on further in this season...

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