Tuesday, May 13, 2008


Before prohibition, NC was a leading wine producer. Our wine making roots go back into the 17th century but, after prohibition wrecked the local industry and as transportation costs continued to fall, NC was not able to compete with the grape growing industry in California. Recently, the industry has been revived. NC has quickly become the 10th largest producer and the local vintages are winning awards. Sales are on the rise and NC competes with California, Chile, France, Spain and many others.

The oil and wine business have gone through similar cycles. Before "the prohibition of price controls", the USA was the number one producer of oil. Today, the USA is the third largest producer. The oil business in the USA was hammered by the government the same way the wine business was hammered. In the late 1960's, our leaders decided it was unfair for the oil companies to keep prospering from oil wells drilled long ago (you guys have made too much money and we the people are going to take it from you). Our government imposed price controls on "old US wells". The market price was declared irrelevant. The oil companies were not allowed to charge more than $4 per barrel. By 1973, one could only buy gasoline on certain days and one often had to wait in line for hours to buy. It should be no surprise that Saudi Arabia became to oil what California had become to grapes.

Saudi Arabia has around 750 billion barrels of oil in reserves, California still makes a lot of wine, but neither has a corner on the market. Just as grapes are being grown again in NC it is time for the US to expand its local oil production. NC would be a good place to start. NC Senators should vote to drill off the Atlantic coasts. Geological maps of sedentary rock shows that the entire coastline of the USA is probably rich with oil.

I mentioned to a friend that the cost of fuel by the Coal to Liquid process is around $50 per barrel. He was skeptical. He asked why the process is not used if it is so cheap. The process is used in South Africa. Indeed, South Africa has made deals to build plants in other countries including China. China is willing to pay whatever it costs to boost its available supply. However, the critical point is that $50 is not cheap. The tar sands of Canada, which have estimated recoverable reserves of 170 billion barrels, are being mined for $30 to $40 per barrel. A nuclear power station planned for Alberta will lower the net cost of this production and expand the amount of recoverable reserves. There are many other examples of substantial quantities available for less than the cost of CTL.

Recoverable reserves is a tricky concept. The barrels of oil, perhaps the trillion barrels, along the USA continental shelf are not listed as recoverable reserves. These reserves are estimated to be about 4 miles deep. In the old days (way back in 1999), it was not economically feasible to extract this oil. Now that oil is up 1200% above its 1999 price, this oil is probably extremely profitable to produce. My answer to my friend is the rhetorical question, Why would anyone spend 12 billion dollars over a 5 to 7 year period to build a CTL plant to make oil at a cost of $50 per barrel when there might be a trillion barrels available for half the price? Before spending that kind of money, it would make a lot of sense to explore the coastline first. The other answer is politics. Environmentalist have a tight hold on a long list of legislators. The environmentalist are misguided but powerful.

Again, I hope you will write your newspaper editor and your legislator. The foolishness of food based ethanol is the easy target but it is part of the greater foolishness about government intervention in the market place. Both Obama and McCain support a massive government boondoggle called cap and trade. We do not need more government, more lobbying and more hidden taxes. Both Obama and McCain want to increase the taxes we pay so the government will have more money to give to the friends of our leaders. It takes a lot of money to run a campaign for president. McCain and Obama rely on the cap and trade industry for substantial donations.

The life of the ocean and our plants is supported by our production of CO2. The more we produce the more will be absorbed. After a time, so much oxygen giving plant life would be produced that the balance would be restored.

If CO2 were a real problem, the production of it could be curtailed by replacing other taxes with a tax on CO2. Al Gores proposal of replacing the payroll tax with a carbon tax would do away with the social security account deficit and the CO2 problem. Gore's plan is much better than the bureaucratic cap and trade plan. Even better would be the reduction of income tax rates combined with a CO2 tax. This would eliminate the AMT problem, boost the economy and take care of excess CO2. Best of all would be the adoption of the Fair Tax. Replacing income taxes with consumption taxes would encourage the saving of energy and money while simplifying the tax code and boosting the economy.

Another friend wonders why we don't have a passenger train system like Europe's. America can easily build such as system. Americans would only need to be willing to go along with gasoline at $9 per gallon. The good news is that we do not need to tax gasoline nearly so heavily to make a difference. A carbon tax of $60 per ton (around 60 cents per gallon) would cause a significant shift in substitution patterns. Lower income taxes combined with higher tax on fuel would allow those who make the effort to lower their tax bill.

We need not get too excited about who wins between Obama and McCain. They will both govern to the left of center as part of the compromise process with a senate with the power of the filibuster. Besides, as the Next Big Future web site reports the election of Obama is not certain by any means. The only democrats to win the popular vote in modern history were Carter, Johnson, Roosevelt and Tilden. Neither Johnson or Carter were re-elected. Carter won only 50.1% of the popular vote. Samuel Tilden won the popular vote in 1876 but he did not win the electoral vote. Americans elect republican presidents at about 2 to 1 over democrats. A lot will happen between now and the election. Speak up now because your influence is far more potent before you vote.

The consumption of oil in the USA is declining. When prices jumped in 1978, oil consumption in the US was 18.8 million barrels per day. By 1983, consumption was down to 15.2 million barrels per day and consumption did not reach the prior peak again until 1997. Average miles driven by owners of light trucks peaked in 1993 and declined by 16% before the next peak in consumption of 21 million barrels per day in 2005. Average miles driven per auto owned increased by 15% between 1993 and 2005. Total miles driven increased by 4%. You should note that there is greater flexibility now as there are far more cars than there are working people in the USA today.

The period of 2005 to 2010 appears to be following the 1978 pattern. It seems reasonable to expect a decline in consumption of about 20%. The low of this cycle might be around 17 million barrels per day. Who knows, batteries have improved a lot. Every day there is another announcement about a new electric or hybrid electric car to be produced. Every day there is a battery improvement announcement. Many a community allows the use of non licensed slow speed electrics. It is possible that liquid oil usage will decline for more than a few years. There is support for a mid speed electric classification for "city car use".

However, the all electric world has been a dream for longer than the dream of private mini helicopters. China will sell about 14 million electric scooters this year. Most Americans want a full sized, powerful car. So far, the cost of powerful electrics is extreme.

California wine is good. Saudi oil is good. There are lots of other brands available.