Centerfield

It's nice to find independent confirmation, or at least reinforcement, of one's own pre-conceived notions. I know that probably sounds like a snark, but it's not. I've always found the doom and gloom scenario of running out of oil silly. Once the price gets high enough, there's plenty of economic impetus to find another way. Greed is the mother of invention, or, as Micheal Douglas' character in Wall Street said, "Greed is good." What was that guy's name?

I believe it was Gordon Gecko..or something like that.

Gordon Gecko.

You're absolutely right. The pumps won't all dry up of a sudden one day. Fossil fuels will gradually become scarcer and scarcer, causing the price to go up. Eventually, oil will be expensive enough to make alternative fuel sources and more stringent conservation measures cost effective.

I meant to type "Gekko", but that pesky Geico gecko must have jumped on my keyboard...

Did you save a lot of money?

(The crowded courtroom grows silent as the justices take the bench. The clerk announces that Justice Alito will announce the decision of the Court)

Alito, J.: "The Supreme Court has just heard arguments on whether to overturn Roe v. Wade, and I have good news."

(The crowd quakes and whispers in excitement)

Alito, J.: "I just saved a bunch of money on my car insurance!"

Ignoring the whole ecological/climate change part of the equation, let's just talk oil.

The argument of "peak oil" isn't necessarily that we are going to run out, but that the supply of cheap oil will exceed demand. In other words, gas will get more expensive.

There is an item know as "parasitic loss" in the power industry. Namely how much energy must we expend to make energy. The reason sand and shale have not been exploited up to this point is that parasitic loss is high and the cost of the oil produced is also. (Again ignoring the nasty smelly environmental concerns.)

Are there other sources available? Yes.
That doesn't mean the transition is going to be quick or fun. Nor does it mean that we should mindlessly sit on our hand and say "The market will fix things".
After all, things like fiber optics did not instantly pop into existence.

I can afford 5 dollar a gallon gas. How many other people can say that?

The reason sand and shale have not been exploited up to this point is that parasitic loss is high and the cost of the oil produced is also.

A bigger reason is the cost of refinery retooling, a major capital investment. The current production cost in the Canadian oil sand fields is between US$9-$16 a barrel.

That doesn't mean the transition is going to be quick or fun. Nor does it mean that we should mindlessly sit on our hand and say "The market will fix things".

I agree overall with your warnings, Bob. But one minor point on the above is that the market's fixing things is mutually exlusive of mindlessly sitting on one's hands. The market will fix things by providing the incentive to get off our hands and start using our minds.

Bob,

Just curious but isn't there a process to make synthetic petrol from coal? If memory serves the Germans made extensive use of it in WWII, but I don't remember what it was called.

How does the efficiency of that process stack up... and any idea at what price point it would become cost effective? Just curious.....

The point I would pay attention to is that of externalities, costs not included in the bare economic cost of production. Like the potential environmental damage from strip-mining chunks of Canada--or Colorado.

Once again, note the production cost of the Canadian companies that are already producing oil from tar sands. With light sweet crude at $50+/barrel, they have some very happy stockholders right now.

Cengel: Your talking about the Fischer-Tropsch process. I seem to remember an oil exec saying that around 45 dollars a barrel Fischer-Tropsch becomes economical.

Tully: Yup. There are also a lot of additional costs incurred with mining your energy source rather than pumping it. More men, material and heavy equipment is required. There is a very good reason we use oil rather than coal. Also these substance-x to gasoline conversion processes require huge amounts of water. Not necessarily an abundant resource in some parts of the west. What happens during a drought?

Interesting historical note: The phrase “wrong side of the tracks” come from the use of trains to transport coal. When the wind blew, coal dust would cover everything on the “wrong side of the tracks”.

I'll throw out the question that all of you economically-minded will quickly jump on but I need to get your opinions: Often in the past we heard suggestions for a high federal tax on gas to then subsidize gas for the poor and/or support the development of alternative sources. Why isn't that a good idea?

It's not a good idea because ultimately the market will do it better.

Now, I'm all for a gas tax high enough to fully fund all costs related to oil-related costs borne by government... from the costs of roads to (and this is the controversial part) the cost of militarily protecting the oil supply. Without having all government costs included in the price of gasoline and other oil-based products, then the government is distorting the market by subsidizing one mode of energy distribution over the others.

What Pat said. And the usual. Regardless of how it's phrased, calls for higher gas taxes are simply calls for higher taxes. Period. The real purpose of such tax increases is social engineering. If you really wanted to make life easier for the poor, you would cut the consumption taxes, not raise them. Consumption taxes are the most regressive taxes there are. They're even worse than payroll taxes.

Alternative sources become available as they make economic sense. It's called "the price system of resource allocation." Taxing fuel to fund alternative energy research is stupid in the direct sense--if they were easy to make cost-effective, private enterprise would already be wroking on it (and they are). In the "real world" sense, the effect of boosting taxes is to spur development by making energy costs higher, and cheaper alternatives thus more attractive. But as soon as you develop cost-efficient alternatives, what do you think the government will be doing to replace those lost revenues? Hmmm?

If you answered "tax the hell out of the new energy sources to the limit they can get away with without destroying the economy," go to the "A" section of the class, and welcome to RealPolitik.

FACTOID: As Tax Prof Blog noted this week, while we scream at the windfall profits currently being reaped by the oil companies, US federal and state gasoline tax collections have exceeded US oil company profits by huge margins for over two decades now. Government wants lower oil consumption the same way they want lower tobacco consumption. NOT. They want the cash.

Taxing fuel to fund alternative energy research is stupid in the direct sense--if they were easy to make cost-effective, private enterprise would already be working on it (and they are).

But what about basic reasearch at the stage where it's NOT easy to make cost-effective? Research tends to proceed like a branching tree...the closer you get to mass fruition, the more branches, but the earlier the stage, the fewer branches. So it seems to make sense that the more initial stages might be best funded without regard to profit, and shared by all. then later, you need competition to fund the increased number of branches to speed innovation. And how do you know when it makes sense to switch. Seems like new areas where you need the basic research would keep opening up. Isn't that what Simon implies?

Plus, the history of science surely includes instances where not-for-profit research uncovered a profitable component of nature purely by accident. Discoveries and inventions seem to work both ways. You can set out to invent something that does a particular thing, and sometimes that works. But other times, you can set out just to find out how different parts of nature work, and then you find out that nature has already evolved a mechanism that can be used as a solution to one of our problems. It's a beautiful thing, BTW! Almost like it was no accident. :-)

Brian, I don't think Tully was (and I know I wasn't) arguing against federal funding for basic scientific research. But a lot of federal money has indeed flowed into solar, wind, fuel cells, ethanol (thanks to the Iowa caucuses) and lord knows what else over the years. That basic research has been done. Making small fuel cells work is now much more in the realm of engineering and finding just the right materials than it is basic scientific research. Moving to a hydrogen energy system is mostly a matter of figuring out the best way to store and distribute the stuff. Those kinds of decisions are best made by the market rather than by government.

I'm not arguing against funding for basic research, nor will I EVER discount the value of serendipitous discoveries. A helluva good case can be made that the Mercury/Gemini/Apollo programs more than paid for themselves, entirely through spinoffs. But the taxpayers who coughed up the funding only got the benefits indirectly, after they were filtered through corporate balance sheets.

Focused taxation to fund focused research is almost always a total ripoff for those being taxed. All too often it ends up being pork subsidies for industry. Once started, it doesn't stop--bureaucracy is eternal. Ethanol research and subsidies are how Robert Dole got the title of "Senator from Archer-Daniels-Midland." And we're $till funding it, even though the science is long settled.

SO the people being taxed cough up the money, but get no overall reduction in their end-cost. Some corporations get richer. Maybe we get a cleaner environment. (And maybe not.) But the net result is still an increase in a regressive consumption tax.