What if? Achieving lower costs, less drilling and a better environment

RodinOur lives are full of “what ifs.” Sometimes we can, with some degree of certainty, agree that if the “what ifs” had occurred, our well-being and our nation’s well-being would be different. When some of the “what ifs” would have seemingly generated something better and the decision was in our control (or at least within our ability to think about and possibly influence), we often become self-critical. Some of the “what ifs” that are likely to trouble us in the future, if we fail to act now, are reflected in the transportation fuel market. Not an exciting subject, perhaps, to begin your morning coffee and OC Register read, but an important one just the same.

What if Nissan’s new effort to cut the costs of battery-powered cars significantly expands the market for electric vehicles (EVs)? Consumer cost estimates for the new Nissan Leaf are around $19,000, including the federal tax credit. This is well within the pocketbooks of some lower income and many middle income buyers.

To be sure, price alone will not generate market success for the Leaf. The range of the new, stripped-down EV will travel about 80 miles on a fully charged battery. To win broad market support, the battery, again fully charged, will probably need to power the car for at least 150-200 miles or drivers will be limited from taking relatively long-distance trips. In a similar vein, new fueling stations, perhaps at places of employment or restaurants as well as on highways, will be required to eliminate drivers’ fear of “running out of gas.” Finally, the life cycle costs of the vehicle will have to compare well with conventional cars.

Hope springs eternal! Assuming the new, lower-cost Leaf, over time, meets price demands of increased numbers of Americans and added infrastructure reduces fears of being stuck on roads without power, would the nation be on the way to a better environment? Sure!

Battery-powered cars and trucks are, almost by definition, cleaner vehicles than gas-powered cars and trucks. If Nissan succeeds, other manufacturers will follow with cheaper electric cars than what is now available. But, because of the vast amount of older cars and trucks now owned by consumers and businesses, electric cars will constitute a small proportion of all cars for a long while.

Clearly, at the present time, the capacity of the nation to meet greenhouse gas and environmental objectives will depend on use of alternative fuels other than electricity. Further, to reach “the best that we can be,” concerning expanded use of electric cars will require natural gas and or nuclear energy to increasingly substitute for coal at U.S. power plants. Both generate much fewer GHG emissions. However, increases in nuclear power are not in the political cards. Coal and natural gas provide energy to approximately one third of U.S. power plants in the nation. Vehicles powered by coal powered plants will generate higher GHG, if emissions from coal and natural gas are fairly allocated to cars and trucks.

Within the next ten years, technological advances and the development of infrastructure will likely permit electric cars to compete in the marketplace successfully and natural gas is likely to become the largest source of electric power.

What if, during the ten-year period, the current restricted gasoline market was opened up to alternative transition fuels, including electricity? I suspect that the competition would lower the price of gasoline and have a negative effect on the price of oil per barrel.

What if producers of oil, facing increased costs of drilling for tight oil (oil found underwater and in shale, often in environmentally sensitive areas), responded to price uncertainty and rising costs by postponing, slowing down or terminating their quest for high-cost oil and driving the cost of futures down? Many experts have indicated that the marginal cost of oil shale development is about $90 and the average cost of most petroleum development or plays is around $60. Others suggest that the when the price per barrel is near $70, investment in rigs and needed pipelines, as well as refinery capacity, will decrease significantly. Put two oil experts in a room and you will get three or more answers as to bottom-line calculations. What we do know is that prices ranging between $60 and $70 will likely cause hesitation concerning drilling in hard-to-get-at-areas.

Put another way, what if, as is probable, market competition for transportation fuels, combined with reasonable regulations, slows down and, in some oil fields, ends the exploration and drilling for oil, particularly in environmentally sensitive areas – areas that are now subject to intense conflict between oil companies, communities and environmental groups. In these instances, market signals concerning costs, returns and profits would do what proponents of varied new taxes want to do and likely will not be able to do, given the present political climate. Contrary to conventional wisdom, lowering the price of gas and oil through competition from alternative transitional fuels could work better and maybe more efficiently than increasing taxes. Environmental objectives would likely be met, including lowering GHG emissions and impeding drilling in fragile environmental areas

The scenario is not a pipe dream! Because of rising costs and market uncertainties, mergers and acquisitions are taking place among oil companies. When combined with the up and down shifts in the number of rigs active at any time, the use of minimal drilling to act as place holders to protect leases and the unpredictable long-term price of oil, some oil company leaders appear to be having second thoughts and engaged in intense opportunity costing concerning exploration and drilling decisions.

What if?