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Religion, structural changes in the oil Industry and the price of oil and gasoline

Oil barrelAmericans — in light of the decline in oil and gas prices — don’t take happy selfies just yet! Clearly, the recent movement of oil prices per barrel below $80 and the cost of gasoline at the pump below $3 a gallon lend cause for, at least strategically, repressed joy among particularly low-income consumers, many of whose budgets for holiday shopping have been expanded near 10 percent. Retail stores are expressing their commitment to the holiday by beginning Christmas sales pre-Thanksgiving. Sure, sales profits were involved in their decisions, once it appeared to them that lower gas prices were here to stay, at least for a while. But don’t be cynical; I am sure the spirit moved them to play carols as background music and to see if in-store decorations made it easier for shoppers to get by headlines of war, climate change and other negative stuff and into, well yes, a buying mood. If retail sales exceed last year’s and GNP is positively affected, it will provide testimony and reaffirm belief that God is on America and the free market’s side, or at least the side of shopping malls and maybe even downtowns. Religious conversions might be up this year…all because of lower costs of gasoline at the pump. The power of the pump!

But, holy Moses (I am ecumenical), we really haven’t been taken across the newly replenished figurative Red Sea yet. There are road signs suggesting we won’t get there, partly because of the historical and current behavior of the oil industry. Why do I say this?

If history is prologue, EIA’s recent projections related to the continued decline of oil and gasoline prices will undergo revisions relatively soon, maybe in 6 months to a year or so. I suspect they will reflect the agency’s long-held view that prices will escalate higher during this and the next decade. Tension in the Middle East, a Saudi/OPEC change of heart on keeping oil prices low, a healthier U.S. economy, continued demand from Asia (particularly China), slower U.S. oil shale well development as well as higher drilling costs and the relatively short productive life span of tight oil wells, and more rigorous state environmental as well as fracking policies, will likely generate a hike in oil and gasoline prices. Owners, who were recently motivated to buy gas-guzzling vehicles because of low gas prices, once again, may soon find it increasingly expensive to travel on highways built by earthlings.

Forget the alternative; that is, like Moses, going to the Promised Land on a highway created by a power greater than your friendly contractor and with access to cheap gas to boot. Moses was lucky he got through in time and his costs were marginal. He was probably pushed by favorable tides and friendly winds. The wonderful Godly thing! He and his colleagues secured low costs and quick trips through the parting waters.

Added to the by-now conventional litany concerning variables affecting the short- and long-term cost and price of gasoline and oil (described in the preceding paragraph), will likely be the possible structural changes that might take place in the oil industry. If they occur, it will lead to higher costs and prices. Indeed, some are already occurring. Halliburton, one of the sinners in Iraq concerning overpricing services and other borderline practices (motivated by the fear of lower gas prices), has succeeded in taking over Baker Hughes for near $35 billion. If approved by U.S. regulators, the combined company will control approximately 30 percent of the oil and gas services market. According to experts, the new entity could capture near 40 percent relatively quickly. Sounds like a perfect case for anti-trust folks or, if not, higher oil and gas costs for consumers.

Several experts believe that if low gas prices continue, oil companies will examine other profit-making, competition-limiting and price-raising activities, including further mergers and acquisitions. Some bright iconoclasts among them even suggest that companies may try to develop and produce alternative fuels.

Amen! Nirvana! Perhaps someday oil companies will push for an Open Fuels Law, conversion of cars to flex-fuel vehicles and competition at the pump…if they can make a buck or two. Maybe they will repent for past monopolistic practices. But don’t hold your breath! Opportunity costing for oil companies is complex and unlikely to quickly breed such public-interest related decisions. Happy Thanksgiving!

A Thanksgiving Feast of Alternatives

Over the river and through the wood

To grandmother’s house we go.

The horse knows the way to carry the sleigh\

Through white and drifted snow.”

Thanksgiving has come and gone, Christmas is coming, and that makes me think of alternative fuels and finding something to replace gasoline in our engines.

What, after all, was the horse and sleight except an old-fashioned means of transportation?  It had served humanity since the Bronze Age.  It has often been said that Julius Caesar and George Washington used essentially the  same transportation technology in pursuing their wars

All this held through the early days of the 20th century. There is a famous scene Jules Verne’s The Mysterious Island, written in 1875, where the adventurers go to investigate a mysterious submarine – in a horse and carriage!  When people started assembling on the New York docks in 1913 to hear reports of the missing Titanic, half of them arrived in horses and carriages.

We eventually made the energy transformation to the “horseless carriage” of automobiles but it wasn’t easy. People were afraid of the new invention.  They didn’t know how to work it. They fretted over the extraordinary speeds that could be reached – 30 miles an hour!  They did not like the nasty exhausts that some new technologies produced.

Nor was it ever certain which means of propulsion for the new “automobiles” would prevail. There were three contenders – the electric car, the steam car and the internal combustion engine running on any number of fuels.  Gasoline was not the foremost possibility. When Henry Ford built his first model in 1895, called the “quadricycle,” he designed it to run on corn ethanol, which seemed like a reasonable alternative.

The steam car set speed records of 200 miles per hour and the electric showed great promise as a gadabout town car. But the internal combustion eventually prevailed. Why?  The steam car, running on coal, took too long to warm up – about 20 minutes.  The electric car had a very short range, as it still does today. The internal combustion engine was awkward because it required the driver to hand-crank the engine from the front.  There was also a question of whether there would be enough fuel available to run large numbers of cars.  At the time, oil was still a relatively rare commodity, marketed mainly for the “lamps of China.”  But when Spindletop gushed forth in 1901, questions about the oil supply faded.  And when Charles Kettering invented the electric starter in 1912, the battle was over.

Still, Henry Ford didn’t particularly like gasoline and never gave up on the idea that ethanol was a better alternative.  Gasoline had a lower octane rating, was much more toxic (particularly when blended with tetra-ethyl lead to raise its octane rating) and emitted more pollutants. It was also more explosive and required complex refining, whereas ethanol was relatively easy to produce. Ford had roots in farm country and as late as 1925, with the farm belt in a chronic recession, he argued that farmers should be growing their own fuel. “The fuel of the future is going to come from fruit like that sumac out by the road, or from apples, weeds, sawdust — almost anything,” he told The New York Times. “There is fuel in every bit of vegetable matter that can be fermented. There’s enough alcohol in one year’s yield of an acre of potatoes to drive the machinery necessary to cultivate the fields for a hundred years.”

These ideas still resonate today.  Making auto fuel from crops has become a reality since we add 10 percent corn ethanol to our gasoline supplies, cutting our dependence on foreign oil.  There is still talk about using the much larger portions of “crop wastes” to produce cellulosic ethanol, although the technology to do this economically has not emerged yet.  Electric cars are getting another run as battery life and range are extended.  And there is a range of other alternatives – compressed natural gas (CNG), liquefied natural gas (LNG), hydrogen fuel cells and methanol derived from natural gas, coal or any number of organic sources, including garbage, crops and crop wastes.  We have a regular Thanksgiving feast of options before us.  It’s just a question of finding out what works best.

So remember, no technology is forever.  The holiday revelers sleighing toward grandmother’s house for Thanksgiving never dreamed they might one day be making the same trip across 300 miles of countryside at speeds of 60 miles an hour. And today when you’re speeding down the Interstate in a car powered by gasoline from Saudi Arabia, you may not dream that in ten years you could be driving a car running on switchgrass grown on the scrubland of South Dakota or natural gas pumped from the Marcellus in Pennsylvania.  Yet stranger things have happened.  You never know where that path over the river and through the woods is going to lead.