Monday, November 07, 2005


Trinidad opens new petrochemical plant

The law of substitution strikes another blow for lower fuel prices in America. Trinidad is now the worlds second largest producer of methanol. The US will import this product to reduce our usage of natural gas.

The plant will produce about 2 million metric tons per year. A little bit here and a little bit there is adding up. This winter is going to be a tough one. Retail fuel oil is carrying a 33 cent margin right now. Bill Frist is calling for congressional hearings to jaw bone down the price. Never-the-less, the price is going to be high this winter.

The laws of supply and demand are still in control. Gradually more supplies will come on line. The new methanol plant in Trinidad will have an effect, but it will not be the supply that pushes marginal new supply to levels above marginal demand.

Earlier I wrote that coal can be converted to diesel fuel at a cost of about $22 per barrel. I think perhaps the $22 is the cost for Quatar to convert natural gas to liquid. At any rate, the exact figure does not alter the important point; the price of fuel is going to come down to the marginal cost of converting tar sands and or coal into liquid.

There are abundant supplies of goal in Australia, China, Germany and America (plus much more elsewhere). There are abundant supplies of tar sands in Canada. When the price of crude was $12 per barrel just a few years ago, it made no sense to set up the plants and processes to use this coal or tar sands for transportation fuel. Today it does make sense and construction has already started.

The law of substitution is more important to the economies of the world than most citizens appreciate. The price of gas can only go so high until other fuels will be used. Some substitutions take longer than others but the process is a constant one. Billons of people make trillions of decisons weekly to substitute for gas. Today, many folks decided where to live, many others decided what car to buy and many others decided how far to travel.

Today the second largest exporter of methanol opened a plant that will help America cut the use of natural gas that is in short supply. Praise to the invisible hand of Adam Smith and praise be to our creator.