The Trouble with Oil

The trouble with oil is that there's too much of it. The known oil reserves in the Middle East would last the world until the year 3000 even if we went back to gas guzzlers that got 6 and 8 MPG. In addition to a permanent oil glut, there is the problem of decreasing prices of energy. Ever since anyone can remember the price of energy has been falling. Energy is in universal use. It stands to reason that through time people would look for ways to do things more efficiently, anything more efficiently, including finding or generating energy. When that happens it takes less energy to do it and the price of energy naturally falls. With the crunch, the price of oil rose, but because of the crunch, industry got a lot more efficient, with the result that the price of oil feil even more.

In 1972 before the oil embargo, the price of oil was $3.50/barrel (55 gallons). Inflation since 1972 has been 500%.Everything since then has been down hill, with no sight yet of the bottom. Immediately after the embargo, oil went to $36.00/barrel. In the intervening years oil has gone up and down but mostly down, until finally in August of 1990, just before the American invasion of the Middle East the price of oil was $12.00/barrel. Put in the inflation factor and the 1990 price of oil is $2.20 in 1972 prices, a drop of $2.30/barrel, since in 1972 it cost $3.50.

The Iraqi invasion of Kuwait was over the price of oil among other things. Iraq complained that Kuwait was exceeding its OPEC quota and selling more oil than its allotment thereby bringing the price of oil down. Iraq, being broke from the Iran-Iraq war, wanted a higher price for its oil and would have been glad to sell Kuwait's share as well, hence the invasion. There were other reasons like a good harbor and some contested oil fields. The net effect of the invasion was to raise the price of oil from $12.00 to $40.00/barrel. Mr. Bush may have been saving Saudi Arabia for democracy, but the price of oil went up to $40.00/barrel anyway.

As long as there is no shooting everybody is doing swell except the United States, Iraq and Kuwait. We have an expeditionary force in the Middle East that is costing us a about $1 billion a day, Iraq can't sell any oil, and Kuwait is pillaged. OPEC is cashing in. They haven't had it so good for a long time. The threat of war raised the 1972 price of oil from $2.20 to $8.00 ($12.00 to $40.00). The Saudis are increasing production, as is every other producer, to take advantage of the windfall of the threat of war and the price of oil is now dropping, not much yet, but the arrow is pointing down. If the situation in the Middle East stabilizes or is solved the price of oil will continue to decline. Hopeful prophets place the price of post-crisis oil at about $20.00. One could easily believe that OPEC and Iraq especially, would settle for this price after the peace or after the war. That would represent a potentially long term price of $4.00 v. $2.20/barrel in 1972 prices. Everything we see in the Middle East may be played out for an increase of $0.50/barrel in 1972 doliars. The only thing that seems to boost oil prices is war or the threat of war. That is the process at work at the present time.

To go back to the beginning, the trouble with oil is that there is too much of it. The present cost of production is $0.75/barrel up $0.25 from the 1972 price of $0.50. To the oil price watchers, $20.00 seems a nice round number, but it does have a special property. For the economists that look at these prices, $20.00 seems to be a price high enough to make a nice profit but low enough to discourage the development of alternative sources of energy that could compete with oil and also low enough to dis courage all but the most efficient oil production.

The nightmare of the OPEC nations, particularly Saudi Arabia, is a source of cheap energy as an alternative to oil. Supposing the Utah experiment with cold fusion had been a success and loads of cheap energy could be generated with cheap electrolysis equipment? Supposing hot fusion could somehow be made to work? What if we could get a source of cheap energy from the sun, and we used the energy to separate hydrogen from oxygen in sea water to produce cheap hydrogen fuel? Suppose we could utilize the vast resources we have in coal, and produce a cheap liquid fuel from coal—2 barrels of liquid fuel per ton of coal? We have 3,500 billion tons of coal in the United States, larger amounts occur else where. What would the Saudis do with a 1000 year supply of oil nobody wanted? So that is the dilemma. How to keep the supply of oil adequate to satisfy all reasonable needs at a price that is both profitable and yet at the same time discourages competition.

The purpose of the United States in the Middle East has got to be more than raising the price of oil. Are we there to defend absolute monarchies? Saudi Arabia is not a text book example of modern government and neither is Kuwait. I do not question the President's judgement in sending American troops to the Persian Gulf to protect American interests. I applaud the fact the President quickly involved the United Nations and enlisted the support of the USSR in this crisis. But we should not delude ourselves that we are there to protect the sovereign rights of Saudi Arabia. If we were, the United States in the person of Secretary of State James Baker should have not given assurances to Saddem Hussein that the United States had no interest in an Arab-Arab war, i.e. go to war with Kuwait if you want to, Mr. Hussein. Our intrusion in the Middle East at the time of Congressional budget making for the Pentagon, kissed the peace dividend goodbye and we still have low taxes and high spending driving the United States natonal debt even higher.

The OPEC people treat oil monopolistically and there is nothing in present international law that can make them change. The USSR has requested permission to join OPEC. Britain and Mexico are on the sidelines but they do not have major percentages of the world's oil supply. Since we can't make OPEC go away, we have to deal with it. In a free market situation where the price of oil will unfailing continue to fall, the only mechanism that seems to prop up the falling price of oil is war. So, we can let free market forces play out and go to war over oil every few years or we can admit we are dealing with a monopoly and act accordingly. We could use the old remedies, we could conquer the Middle East and rule it like the Romans, Arabs, Ottomans, and British before us or we could forget about the free market for oil and negotiate the price. Remember, that while oil is in a few hands it is in vast supply. The forces of invention and innovation are at work reducing the price of energy at every turn, so that there is inexorable downward pressure on the price. If we succumb to the siren song of market forces, its war. If we recognize the long term implications, we will negotiate.

Since the United States is the self appointed oil policeman, the United States should convene the industrial nations of the world and form an oil price commission. The commission should be specifically empowered to negotiate the price of oil for a period of no less than ten or no more than twenty years with OPEC. There should be an inflation escalator in the contract that would compensate for inflation and guarantee the price in somewhat absolute terms. The price should be the one the brokers predict for the end of this altercation—$20.00/bbl.

Even if Texas and Alaska were booming they cannot compete with the Middle East because they do not have the reserves and hence no staying power. The Saudis are in this for the 1000 year haul. With negotiated prices we would not have oil worries for hundreds of years, and we wouldn't have to send American boys to get killed to keep the price of oil up.

After the industrial world negotiated with OPEC for the price of oil, it would still have a goad many market options and of course should exploit everyone, since free enterprize and free markets make the world go around. Here is what can be done:

• The domestic price of gasoline could be adjusted to offset trade deficits arising from oil. Europe, today, imposes $2 and $3 taxes on a gallon of gasoline, promoting conservation, discouraging imports, and raising revenue. In the U.S. we have yet to understand this and have free market advocates saying don't knock the increases in gasoline ($0.50/gal) that's the free market at work, which it is not, since the whole oil thing is a monopoly. The same people raise the dickens over a $0.095 increase in taxes. Apparently its better to be price gouged fifty cents than taxed nine and a half cents.

• The Solar Research Institute in Colorado could be revitalized and refunded to continue the excellent work It was doing in devising practical ways of using solar energy.

• The Bureau of Reclamation which has built all the dams its going to build and which needs another mission, can be given the mission of harnessing the winds on the great plains. The great plains is a harsh country. It is cold in the winter, hot in the summer, and it is dry. The most common plant species there is buffalo grass and it grows about 4 inches tall. It is marginal for cattle, bad for plowed crops—the dust bowl was here, and it is emptying out of people. The ones who stay are the original rugged individuals, they are tough. This area has been proposed to be a vast reserve called the buffalo common. The idea is to give the land back to Its natural population of buffalo. What the great plains has, more than anything, is wind. The wind blows all the time. There are pressure ridges in the great plains that run for miles and miles—hundreds of miles. They would make ideal sites for wind mills. Don't think of the Delco wind mills on the farms pumping water or generating a few amps of power, think of the Cadillac of wind mills, giant rotors hundreds of feet in diameter, driving humongous turbines. A vast grid of wind mills could be placed on the plains and attached to the national power grid. This would constitute a major energy resource and would contribute a significant percentage of our national energy requirement. It would produce a sustainable industry for the great plains, where one does not exist today and would not interfere with the natural diversity.

• Co-generation is a technology waiting to become important. The Idea is simple but the immune system of the power industry keeps rejecting the transplant. The idea of co-generation is that anyone who is hooked up to a power grid, like your house, should be able to put power into the grid as well as take power out of it. An apartment in New York City has a windmill on it's roof. It is hooked into the grid and it can add power to the grid. The apartment uses electricity, but it also makes electricity. What it doesn't use it puts into the grid and the meter runs backwards. Low-head hydroelectric generation is another technology waiting to become important. Solar energy collection and conversion to electricity is another and the list goes on with ingenuity being the only limiting factor.

• Energy conservation is the biggest "oil field" we can find. We can continue to manufacture more energy efficient automobiles. For instance, automobile engines that are external combustion instead of internal combustion, which would be more energy efficient, and also significantly reduce pollution. Then, there is the matter of energy efficient household appliances refrigerators, stoves, air conditioners et al. Insulation, in all heat applications, is still a big winner. No one can over insulate a home, for instance. Industry is progressing at a good rate in efficient energy use primarily because of foreign competition, but a lot more can and should be done.

• We have to get serious about recycling. Recycling consists of two parts: (1) a gathering process that collects the diffuse wastes and concentrates them for processing, (2) there is the problem of manufacturing useful commodities from the collected waste. Consider the present manufacturing and distribution system. The great number of very expensive manufacturing plants that make things and the vast distribution system that makes them available to consumers. Recycling runs that system backwards. A vast collection system has to operate to collect the materials to be used as raw materials in a great number of manufacturing plants. The factory that reprocesses and recycles newsprint is just as expensive to design, build and operate as a plant that process virgin pulp. As a matter of fact, the greatest roadblock to the efficient use of old news print and other printed paper is de-inking the paper. We need the Commerce Department to fund some research on de-inking to find a fast, reliable, cheap way to de-ink newsprint. The recycling industry is potentially as large as the cycling industry. We need a few captains of industry and an enlightened Federal government to get about and solve some of these problems and provide some goods and services to the country, instead of piling up deficits for an unneeded military. We need some planners for the economic wars and we need to retire some of the planners for the hot wars.

Energy prices from historic times to the present time are on an inexorable downward slide. From time to time wars are waged to raise the price of oil. We are experiencing such a war in the Middle East. Saddem Hussein was mad at Kuwait for cheating on their oil quota and he decided to use force to do some thing about it. We responded to his invasion with the Desert Shield but not until after we told him his invasion was of no concern to us. The question is will we have a shooting war in the Middle East. The people who set the prices for oil don't care. Their estimate, if we have a shooting war, is the price of oil will go to about $20.00 when the shooting is over. Their estimate of the price after a negotiated settlement is about $20.00. Both figures obviously up from the $12.00 at the start of the incident. The present situation will end. Will we learn anything or will we just blunder on to the next war after the price of oil drops to a level unacceptable to the oil producers?

Saddem Hussein could have confounded the entire world if he had invaded Kuwait with the intention of setting up an independent, democratic government. Even if it resembled his military dictatorship. As it is, he was after an oil price increase and Kuwait had to be punished for cheating so he went in and took the country over to settle his scores. The United States came to the rescue of the most conservative absolute monarchy on the face of the earth. One has to go to Albania or Iraq itself to find a more repressive government. Should the United States under any guise be the protector of an absolute monarchy? If we are to commit the lives of American youth to a United Nations cause then, some thing more than an increase in the rice of oil should come out of the proceedings. At the most, isn't it time that both Kuwait and Saudi Arabia start thinking about some sort of representative government? Britain is a good model and there are others. At the least isn't it time to introduce the United Nations Charter of Human Rights to this part of the world?

Epilogue

The ecological lesson of the oil crisis is that ecological systems evolve to greater efficiency and use less energy. This is true of biological systems that develop increasing complexity, and use, and reuse the primary materials produced by photosynthesis, in a more efficient manner. When we talk about food chains in nature, we are talking about ecological systems that use and reuse the material in them. The food the plants made ends up being mushrooms, birds, insects, worms, or elk. In the technological system of man, the same principles apply, human systems, as they evolve, become more energy efficient and more things can be done for the same amount of energy. When the system becomes more efficient the unit work can be done for less energy and more things can be made per unit of energy. An auto engine that weighs 5 pounds for every horsepower It generates is less efficient than one that weighs 3 pounds per horsepower and therefore the 3 to 1 engine will be more energy efficient than the 5 to 1 engine. In the early days of electronics, vacuum tubes were used. They required relatively large amounts of electricity. An early portable radio had batteries that weighed ten pounds and lasted for two or three hours. Today, a transistor radio is powered by a battery about the size of dime and it will play ten or twenty hours. The early days of computers and vacuum tubes produced monster computers. Today desk top computers are ten to twenty times more powerful than the vacuum tube computers that filled a whole room.

In the early seventies there was a projection that electrical energy needs in the United States would double by the eighties. Because of the conservation efforts of ordinary citizens, most public utilities scrapped their ten year programs because the need for more energy disappeared because of conservation.

Ecological systems self-design. They do it because they have the energy and the genes to do it. Self designing, self-generating, self-replicating decision systems are what the world is all about. In nature systems become more efficient by becoming more complicated, man made systems may become more efficient because they are simplified. What ever the mechanism, systems tend to become more efficient. Systems that are more efficient use less energy. In a market economy based upon ecological system, that means the price of energy has to fall, because the system is ever seeking ways to use the energy more efficiently since it means a net savings in the system to do so. It may mean a householder pays less for heating the home, or that a manufacturer can make a car with less energy and thereby be at a competitive advantage in the market. Since oil is one of the energy sources powering human ecological systems, the system responds to higher prices by finding more efficient ways to use oil thereby bring down its price. That's what happened to cars after 1972. The price of oil went up and so did the MPG. The highest MPG is in Europe where gasoline costs $3.00 and $4.00/ gallon . Do we fight wars over this ecological principle or learn to live with it?

...Ted Sudia...

© Copyright 1990
Institute for domestic Tranquility