Newt's Plan for $2.50 Gasoline

In the video clip above from the last GOP presidential candidate debate, Newt Gingrich revealed that he has a plan for $2.50 a gallon gasoline. Unfortunately, he did not say what the plan involved and did not release a white paper giving any details. The resulting intellectual vacuum has led to some interesting speculation.

Yesterday, the Atlantic (here) made some assumptions and filled in the blanks for Newt. If we look around the world for countries that have cheaper gas prices, we find that these countries accomplish the miracle through straight-forward subsidies. For example, in Venezuela, gasoline is 12 cents a gallon!

Doing the math for the US, for the last seven years American's used roughly 3.3 billion barrels of oil which at 42 gallons per barrel yields 134 billion gallons of gas per year. Gas is currently averaging about $3.85 a gallon. To get down to $2.50 would require eliminating the gas tax (18 cents per gallon going to roads) leaving $3.68 ($3.85 - 0.18). To get to $2.50 would require another $1.17 ($3.85 - 0.18 - 1.17 = $2.50). Multiplying by 134 billion gallons per year ($1.17 * 134B = $157 B) and adding back in $25B in gas tax you get $187B.

This might seem like a lot of money but the Bush Tax cuts cost $2.5T over their first ten years. Eliminating the Bush tax cuts and using the money for fuel subsidies would leave money left over for other ideas Gingrich might have. So far, this is the only way anyone has been able to figure out that would actually satisfy Newt's plan. The only problem is that Newt is opposed to any tax increases even if used to subsidize $2.50 gasoline so he must have in mind increasing the deficit (was it Gingrich that said deficits don't matter or was that Dick Cheney, I'm getting confused).

Surprise: US Has Cheapest Energy Prices in the World

The video above, from interviews on CNBC this morning, revealed a number of interesting points about energy prices and energy supply: (1) Newt Gingrich has a plan for $2.50-a-gallon gasoline, but no one (including Gingrich) knows what the plan is or considers it vaguely realistic, (2) the US has the lowest energy prices in the world, but they still aren't low enough for the US economy to recover, (3) the US produces surplus natural gas that could be used for transportation, (4) the natural gas infrastructure already exists, but (5) politicians in Washington are fixated on drilling for more oil.

T. Boone Pickens, who is also interviewed in the video above, has been having a debate with the Wall Street Journal (WSJ) over natural gas (here). The WSJ thinks that the "Pickens Plan" is a "Boone Doggle". The Pickens Plan "to break US oil addiction" is obviously not in the interests of Big Oil. The debate is another indication that Peak Oil is either very close or has already been reached and that the Age of Austerity will be with us for a long time.

Double Down on Relief Wells

Senator Frank Lautenberg (D-NJ) has introduced legislation requiring the drilling of relief wells at all new drilling sites off the coast of the US. Today CNN is reporting that the industry response has been negative. Relief wells would be (1) expensive and (2) dangerous (what if the relief well blew out?). If relief wells are too expensive and dangerous, then maybe the same can be said for the original wells (pictured above are the relief wells for the Ixtox Oil Spill).

The "Ultimate Failsafe Device"

Today's New York Times reported an in-depth investigation of oil well blow-out preventers (BOP), the "failsafe" devices that were supposed to have prevented the on-going Deepwater Horizon oil spill. Above is pictured the shuttle valve and blind shear ram that is supposed to prevent blow outs. Hydraulic fluid is piped through the shuttle valve to the blind (as in window blind) shear ram to cut through the drilling pipe and close the well (the NY Times has a nice animation and graphics on its web site). The problem is that there was only one shuttle valve and only one blind shear ram creating a single point of failure.

The details of how the BOP was allowed to operate with a single point of failure provide fascinating reading. The free-market did not insure that BP or any of its contractors would operate safely. Government regulation did not insure that the BOP was tested, installed and maintained properly. And, we are left with the backup plan of drilling two relief wells.

My worry is that increased government regulation focused on BOPs will not be enough to prevent future environmental catastrophes. The technology is simply too flaky, too difficult to test, too complicated and too difficult to maintain for the Mineral Management Services to regulate. That's why I conclude that drilling two wells from the start is the only fail-safe mechanism.

Double Thinking Deepwater Drilling

The NY Times yesterday reported that the US Federal government is thinking about developing

...a kind of parallel technological universe in which government would have the robots, the coffer dams and the other tools necessary to help control a big blowout.

At the same time, BP seems to be running out of it's own options to stop the leak. BP is currently drilling a relief well (estimated completion in August 2010) as the last best solution to a deepwater well blowout. Relief wells have worked before (above is pictured the Montara wellhead platform in the Timor Sea which started leaking on August 21, 2009). The problem is that relief wells take a long time to drill and a lot of oil can leak while we're waiting.

Rather than have a parallel technological universe set up by the Federal government (expensive and unlikely to work when needed), the obvious solution seems to be drilling both wells at the same time. Yes, drilling two wells will be twice as expensive. The equation, however, is cost-benefit = 2 x (cost of oil) - 1 x (environmental catastrophe). Another benefit is that 2 x (cost of oil) for deepwater drilling will marginally increase the cost of gasoline which will marginally increase the incentives for carbon neutral technology. Seems like a win-win.

Unfortunately, the double-think proposal is a close-the-barn-door-after-the-horse-is-gone solution. Prince William Sound in Alaska has still not recovered from the Exxon Valdez spill. The Deepwater Horizon spill is much larger and the recovery will be much, much longer.

Can we count on markets to prevent future oil-spill catastrophes? BP will certainly be damaged by the event and other oil companies will be re-thinking safety procedures. However, markets fundamentally reward risk, cost-cutting and externalization of cost (government bailouts, environmental damage, pollution, etc.). Safety costs money and there will always be market pressure to cut corners.

Hey, Slick! Don't Sheen Me On!

On ABC's "This Week" program, BP America Chairman Lamar McKay said that the Deepwater Horizon oil spill was the result of a fail-safe mechanism that failed to fail safe.

So, just what are the rules for reporting oil spills to the EPA? If I jump into the Gulf of Mexico with some "greasy kids stuff" on my hair, do I have to report it to the EPA? Here's the EPA Rule:

The requirement for reporting oil spills stems from the Discharge of Oil Regulation, known as the "sheen rule." Under this regulation, oil spill reporting does not depend on the specific amount of oil spilled, but on the presence of a visible sheen created by the spilled oil.

So, maybe I would have to report myself and BP's problem is really the amount of "sheen" and not the 5-25 thousand barrels of crude oil being discharged daily from Deepwater Horizon or what remains of it. Interestingly enough, Haliburton (Dick Cheney's old company) may have been involved or will be involved in this disaster.

Honestly, you can' t make this stuff up! OK, I can make some stuff up: Sara Palin is putting on her waders and going to help with the clean up. Spill, Baby, Spill!

Hey, Slick!

Last night on the PBS News Hour, BP spokeswoman Ayana Mcintosh-Lee said in response to a question about the Deepwater Horizon oil spill, "Well, we have some of the best minds working on this. And they are working around the clock in areas in Houston, in London, as well as here in Houma..."

OK, these are the same best minds that created an ultra-deepwater dynamic positioned semi-submersible oil rig with a blow-out valve that was supposed to prevent spills? Actually, not! The drilling rig was built by a Korean Company, Hyundai Heavy Industries. I guess work isn't going on in Korea.

The political impact of the spill is already starting (here and here), especially since the Obama administration wants more drilling off the US East coast. Before the spin and back pedaling starts, we should understand this event as part of the diminishing returns associated with the approach of Peak Oil. Ultra-deep wells are necessary because the easy-to-reach deposits have already been tapped. Evidently, the engineering on ultra-deep water wells is not quite up to the task and the externality in this case could become a major environmental nightmare.

The case for "drill, baby, drill!" or in this case "spill, baby, spill!" has never made much sense. More drilling means both more carbon in the atmosphere and more environmental degradation. Federal R&D for carbon-neutral technology deserves a strong influx of funds (probably on the order of what will be spent cleaning up the BP Spill), but isn't getting it. Oh, wait a minute, the Oil & Gas Industry make huge campaign contributions. Solar cell, wind-turbine, geo-thermal and other renewable energy industries aren't even on the list.