FIX THE ENERGY DILEMMA – THE WAY OUT
Theodore W. Noon, Jr.
(an index appears at the end of this article)
Theodore W. Noon, Jr.
(an index appears at the end of this article)
The writer of this article majored in geology at Harvard College, Class of 1940, and joined Texaco in the Southwest. He rejoined Texaco after World War II for three years on wildcat oil wells. He then attended Harvard Business School. His years of work have been on the financial side following all forms of energy. He has held membership in the American Association of Petroleum Geologists for over 60 years, as well as the American Institute of Mining and Petroleum Engineers. He is an early CFA charter holder.
Civilization is largely organization. And there is a need for the will to stay organized. Civilization trips over its own complications and this is what we in the U.S. are tripping over now. Our complications of oil and electricity are critically organizing factors in our hi-tech, high speed, increasingly complex, terrorist-infested world.
The Big Powers had coal during the Industrial Revolution. For the past 100 years oil has taken over, with coal still important for electricity generation and for making steel. Big Powers in the future will be those which have nuclear power, as oil and coal run out, with some important contribution from renewable energy of solar, wind, magma and biomass.
Energy is a problem for U.S. legislators in Washington working within the context of the financial, scientific, and engineering communities. We shall succeed in our objective of replacing our declining availability of world oil and natural gas only as we understand how each energy source relates to the context and the timing of action on each energy source. This is a huge task that will take several decades to contend with.
This is not the best of times in terms of context for the U.S. to be launching large programs for nuclear plants, offshore drilling, expansion of rail and water transportation and renewing the electric grid system of the United States. The context for these programs sees us needing large investment dollars in a period when we are coming off an exorbitant use of dollars for consumption in housing and importing energy that has left us with:
1. Massive federal debt,
2. A badly declining dollar at a time when commodities needed for these four areas are in a strong inflating mode,
3. Our banking system disarray,
4. An extraordinary liquidity that gives us interest rates encouraging speculation again and discouraging personal savings,
5. A continuance of our inflation every year for over the past 60 years,
6. U.S. energy imports costing about one trillion (sic) dollars in 2008 versus 4 billion dollars in 1972,
7. And the need to increase the number of people capable of working on these four programs.
Americans rise to a crisis. I’m sure we shall do so now that we finally understand that we have one. We should not delay our response to this energy crisis as we shall need all the time we have in the reasonable period ahead available for its correction.
The need for the U.S. to build nuclear plants comes when the builders of them are busy all over the world and comes when the number of knowledgeable people in this area needs to be increased, particularly in the U.S. where no new plants have been built in over thirty years. Because of these factors and the higher costs, we should start right away on John McCain’s “45 plants by 2030.” We should increase the number of times we inspect our nuclear plants, particularly the older ones.
We still have the problem of nuclear waste disposal that has been a continuing problem for decades. We need to finish the Yucca Mountain, Nevada waste disposal site as soon as possible and start using it. John Reid of Nevada is head of the U.S. Senate and does not want nuclear waste in Nevada, even though this site has cost over $2 billion thus far. We may have to go to a parliamentary system in congress in order to break this impasse.
We should build at least one spent-fuel-rod-reprocessing plant in order to have more available nuclear fuel over time; those fuel rods are valuable for future fuel.
The U.S. made a 30-year contract with Japan in 1988 to reprocess our spent-fuel-rods, even though President Carter earlier would not let such a plant, built in South Carolina, start up because plutonium, a product of the plants, might fall into the wrong hands.
The U.S. has been removing plutonium from Russian nuclear bombs to keep the plutonium in a safe place. Russia wants to increase its uranium stocks by processing the spent-fuel-rods of the uranium that the U.S. sells to other nations as fuel for nuclear plants.
It would be helpful if we could convince the larger oil companies to use some of their present large profits to build and own nuclear plants, as to their being more fully in the energy business. The railroads kept to the rails and let trucks and airlines take their freight and passengers; and taxes on gasoline built the super highways.
I encouraged Continental Oil Company for over four years to buy Consolidation Coal Company, with its over 100 years of coal reserves. The management of Continental after buying it soon found that it did not want to grow into this part of the energy area and sold it to DuPont. So, it is hard to change habits in energy or railroads.
The U.S. electric grid needs great improvement and more capacity in order to handle all power generated from nuclear, wind, solar with the point of view in mind that automobiles, railroads, and commuter lines will be using greatly increased quantities of electricity.
President Bush wants the oil companies to explore more offshore both U.S. coasts and in northern Alaska. This should be started right away as discovery of oil in these areas will lessen our otherwise large imports of oil that would increase our already large trade deficit, until we can get over to massive new nuclear energy and the infrastructure to use it. There is a shortage of offshore rigs worldwide, and greatly increased prices to use them. We should drill in northern Alaska and ANWAR; the Prudhoe Bay oil pipeline has one million barrels per day of excess capacity now.
The U.S. oil companies, expropriated in 1973 from their foreign interests, now have control of about 20% of the world’s oil, with foreign producers and countries controlling 80%. The foreign oil countries have not been exploring much with their greatly increased revenues. To make the future for oil worse, access by U.S. oil companies to foreign exploratory prospects is severely limited by these countries’ policies.
Thus, U.S. oil industry is not doing explorations as much as it could because of this denied access. The U.S. oil companies are what’s left of the U.S. oil industry that discovered about 70% of all the oil discovered in the world (excepting U.S.S.R.) from discovery here in Pennsylvania in 1859 to 1972.
An international conference of oil importing countries and those that export oil might be helpful. The objective of the conference would be to seek oil companies’ access to explore on acreage in all countries of the world that have potential for oil and to allow broad agreement of sharing profits from the discoveries. The idea is to get world opinions out in the open on this matter as necessary for economic stability and progress in the world. In oil areas, only 1% - 3% are underlain by oil.
U.S. asphalt, plastics and about half of all clothing come from natural gas liquids and oil.
Congress passed the Natural Gas Act of 1956 which freed the price of natural gas at the well head from its 6¢ per MCF or 1 million BTUs price control, but President Eisenhower vetoed it. The wholesale price has been to over $14.00 per MCF or 1 million BTUs recently. The fixed price for natural gas from 1956 – 1972 reduced demand for fuel oil greatly, particularly for home heating in the Middle West; natural gas was much cheaper. This lessened fuel oil demand, and caused oil companies to maximize gasoline output. This led to an excess of gasoline, such that the price of oil in the U.S. (which set oil prices all over the world for many decades) could not rise much from 1956 to the early 1970’s. This was the period of Japan and Germany rebuilding the damage of World War II. And the U.S. had inflation in each of those years.
The U.S. has a great deal of coal, probably 100 years' supply. Coal is still an air pollutant and is still the fuel for the bulk of U.S. electricity. China, too, is using a great deal of coal and importing more.
Germany in World War II fueled its airplanes with gasoline made from coal. The U.S. Bureau of Mines got this methodology immediately as World War II ended. South Africa has done a lot of work with oil made from coal. Our goal should be to free coal from carbon dioxide and mercury polluting, even though it may be expensive. Coal is comparatively cheap now. The U.S. has it in great quantity. I do not want to put the $3.00 tax on coal phased in 30¢ per year for 10 years, but rather give Americans a few years to see if they can clean it adequately. If we succeed, China can use our process for the very large amounts it uses.
Alternative Energy Sources (AES) are a small 3% - 4% of U.S. energy usage today. Wind and solar are doing well despite being expensive, but are intermittent sources.
The tar sands of Athabasca, Canada took about 40 years of experimenting and higher oil prices to make them economical. Sun Oil (Sunoco) took on this task in the mid 1960s via its subsidiary, Suncor. Canada gave subsidies and, I think, reduced or eliminated the government’s royalty. Tar sands are on the surface and contain dead oil; there is no fluorescence to it under ultra violet light. It is mostly a mining job. In 1963, I talked with Sun about a Prudential Insurance Company loan for its project. At that time the steam shovels and trucks were very large; they have gotten much bigger. Moreover, Suncor is currently building a $4 billion plant to turn the output of the tar sands into oil refinable in U.S. refineries. China and others have taken leases recently in these tar sands which have a huge amount of oil in place.
Venezuela has tar sands, too. Together the two tar sand areas approach the oil resources of Saudi Arabia, but are difficult, expensive, and time-consuming to extract.
Because of the wide fluctuations in the prices of oil, we need our Federal Government more in the price calculation for gasoline and other products. We should phase in a $3.00 per gallon tax on gasoline, 30¢ each year for 10 years. That puts an umbrella over AES, warns the speculators that the government has a big stake in product prices, and should encourage industry to tackle the expensive projects, I think. If they see that the price will stay up, the current $140 per barrel of oil was back to about $10 per barrel as recently as in 1999. The price will probably stay up anyway, but we cannot risk it. We thought the price would stay up after 1973. It went higher but, then, dropped back to $10 - $15 - $20 between 1973 and today.
The $3.00 tax would go on fuel oil, diesel, the BTU equivalent of natural gas, as well as gasoline. The combination puts an umbrella over AES and coal. In the 10th year, the revenue would approach $1 trillion.
Europe has taxed gasoline heavily for over 40 years. The European governments were getting more revenue for many years from a barrel of oil than the Middle East countries were getting in profit. Europe has done a better job than our federal government. Europe does not have the suburbs we have; it kept its farmlands, and it has an efficient transportation system, supplementing small cars of which half now use a better diesel fuel. Europe saw the problems early. The Europeans regard gasoline as a luxury; we regard it as a necessity. The U.S. is bigger and some of the Far West roads have long distances out there, no doubt about it. But we do not have an infrastructure on transportation that will act as a substitute for the automobile, where about half of our population lives in suburbs and further out.
It is a huge job to shift the automobiles of Americans to smaller cars, to try to get oil from shale oil, tidal energy, fuel cells, ,solar, magma, wind power, as well as to deliver this energy to consumers conveniently. Few realize how huge!
The American consumer did not want small cars when George Romney’s American Motors came out with a small car in 1956. The U.S. government did nothing then to encourage the use of small cars. Today’s foreign auto makers have been making small cars for decades. They import these easily and, also, make some inside the United States. General Motors and Ford put their great emphasis on SUVs (sport utility vehicles) built on a truck chassis. After 1973, the federal government programs for autos cut energy usage in about half per dollar of GDP. Then it eased up on energy usage and did nothing about the larger auto SUVs, and speeds of 80 mph on highways.
Energy in 1972 was about 6% of the average annual income of the American consumers. It dropped below 4% when the government stepped in with the 55 mph speed limit and its requirement for efficient fuel mileage of auto manufacturers, encouraging smaller cars. With foreign car makers doing well in the U.S., we need to do better with our near bankrupt Ford and General Motors!
Canada found oil in 1858 in Ontario, a year before the U.S. Americans discovered about 70% of all the oil found in the world, excluding Russia, from 1859 – 1972. Why? This is a key point. In America we have freedom. And every landowner owns the mineral rights to the center of the earth in America. The key here is that anybody can make a deal with a landowner and drill the next day. With governments, including our own, it takes five years sometimes to get the ability to drill a well. This is an aside now. The Groningen field in Holland was found in 1958 – the biggest gas field in the world to that point. The Dutch had been freezing in the dark for centuries. Exxon and Royal Dutch found it; they had no title when they went in; they had first to find something and then go to the crown and say, “Please may we have some title.” Well, they dusted off the Napoleonic Code of 1812 and translated the French into Dutch and said, “Yes.” The governments own all the mineral rights in the rest of the world except for a little in Canada before a certain date and some in Germany. All the other mineral rights are owned by the central governments and they sit on them just like our government has been sitting on the offshore and Alaska pretty much.
American geologists went all over the world. Saudi Arabian oil was discovered by Americans before World War II. Standard Cal found it in Bahrain Island in the Persian Gulf and then they invited Texaco in and they said, “Let’s go think about the mainland of Saudi Arabia.” Texaco and Cal Standard found oil on the mainland. They found a field, Ghawar Field, 130 miles long. That’s about as long as Massachusetts. It’s huge. That’s what they discovered. They thought they had thirty different fields there but, as they drilled, it became one field. Enormous. So they invited Exxon and Mobil in to help them sell it. So the four of them were all Americans. But that helped the 70%, you see, because that’s the biggest thing around these days still. They really drilled it up after World War II. Same way with Gulf Oil in Kuwait. They found it just before World War II and drilled it up after World War II. The Germans tried to get in the Middle East during World War II and they almost did.
Initially, Middle East countries got their revenues from oil paid in gold. This changed to the U.S. dollar many years ago. As the U.S. dollar has weakened recently against other currencies, the non-U.S. countries buying oil from the Middle East are paying less for oil than the U.S. is paying because they are buying dollars for less of their currencies than they were. Kuwait has shifted from the U.S. dollar to the Euro.
The price of oil in the U.S. in 1933 was 10¢ a barrel because of the East Texas discovery. That’s the biggest field in the lower 48. It was found by a non-geologist, a driller, who had the ability and desire to drill right here. He sold the ownership three times over and he never made a nickel out of it. But he found the biggest oil field in the lower 48. Dad Joiner was his name. That dropped the price of oil to 10¢ a barrel. The governor of Oklahoma shut all of their oil fields in and wasn’t going to produce another drop until it got back to a dollar a barrel. A barrel of oil today is close to $140.
From 1956 to 1973 Japan’s use of oil increased over 20% a year for these entire seventeen years. Every year compounded. They were rebuilding Japan after World War II. Germany’s increased 14%. They were rebuilding Germany during that same time period. And thanks to a fairly reasonable price for oil, they were able to do it at a bargain. China and India are coming up now and demanding oil in big ways and I put those figures of Japan and Germany as a proxy to show the comparability to what China and India are going to require, and they’re 9% or 10% increased a year so far.
Japan appreciated the need for oil earlier. There are a lot of fields in the Far East, Indonesia and Borneo and down in those islands. The Japanese wanted that oil. Before they went into World War II they were trying to get at it and we slapped their wrist. And then they attacked Pearl Harbor.
All oil found in the world was priced at a U.S. Gulf Coast price, less transportation to the Gulf Coast. That was the price at origin for many decades. Because the US could control the volume of oil in the world through its exports, it set the price. We lost that ability in 1973. The U.S. fueled the 1967 Middle East Israeli War, but could not fuel the 1973 war. O.P.E.C. (Organization of Petroleum Exporting Countries) took over, raised prices, and nationalized oil companies’ holdings when we lost the ability to do so. O.P.E.C. was started by Venezuela. It’s a Spanish idea. It isn’t a Middle East idea. Venezuela kept raising the prices with taxes on its oil down there and it got so it couldn’t sell it against the Middle East oil cheaper. So they went over to the Middle East and organized O.P.E.C. They waited about ten or eleven years for one thing to happen, and that was for the U.S. to lose its surplus so that it could not export and control the price.
Energy usage in the U.S. has seen some gradual transitions from whale oil to kerosene for lamps, from wood to kerosene for heat, from dirt roads to asphalt, from kerosene lamps to electricity, from coal to oil and natural gas for home heating and cooling (with the tiny thermostat), from wood to plastics, from natural fibers to synthetic cloth, and from coal and oil to nuclear power for electricity. All transitions have added productivity to economies and comfort to people.
We have had inflation for sixty years in this country and no deflation whatsoever. In a court of law, that shows intent by the government. That’s one of the reasons the price of oil is up a lot. Inflation itself did not go off. It went up every year and some years in the late 1970’s it went up a lot. In 1936 gasoline was about 16¢ a gallon. We would scratch our pockets and get a couple of gallons and go fishing on the coast there in New England. With inflation being about 20 times since then, $3.20 is where gasoline should be today, corrected for inflation.
We are now paying about $1 trillion a year for oil imports. In 1972 before the nationalization and before O.P.E.C. took over, we were spending $4 billion a year for imports. In 1980 it was $80 billion. So we’ve come from $4 billion in 1972 to $80 billion in 1980 to about a trillion a year now.
We’re bleeding ourselves. With Iraq and all these other things and star wars and social security and Medicare, we’re bleeding the federal government and the deficits are up. Our trade deficit is getting huge.
High prices for oil products will encourage habit changes in better conservation, along with lower speed limits, more efficient and smaller cars and increased use of mass transportation. The pain is there for all to feel of having to pay more. Reduced demand for foreign oil products and oil will be an important contribution to the financial problems the U.S. faces now.
We have to go to a Parliamentary System in Congress in order to break the many-year impasse on nuclear waste, narcotic drugs, Medicare, Social Security, and a few other important problems left on the table too long. There has been a timidity in Washington for decades now. Congress does not seem to want to step up to the plate, afraid of hurting people’s feelings and their votes. The political correctness of some college faculties, that deals with feelings instead of facts and truth, has infected Congress to the extent there is increasing talk of going to a Parliamentary System, except we don’t know how to replace the Queen. Apparently, it is easier to get heavy taxes on oil products through a Parliamentary System; Europe does not have the suburb problem that the U.S. has; it kept its farmland; and there is a very efficient transportation system, as well as smaller cars. Much higher prices for gasoline and diesel did this.
The bulk of oil is found under pressure in sandstone reservoirs above salt water, with natural gas on top underneath the containing barrier (usually shale). The theoretical porosity maximum of such a sand body is about 46% open spaces, like open space in a orange crate if the oranges were all the same size and stacked on each other. One never finds this high porosity in nature because many things cut down this open space, such as different sizes and shapes of the grains, cementing materials, etc. I’ve done core analysis for Texaco. 20-25% porosity is quite good and not found often enough. Some limestones are prolific sources of oil, including coral reefs. Quite often ancient coral reefs are killed off by a black carbonaceous shale. Oil rarely occurs in pools.
The ability of oil to move to the well bore is measured in darcies and millidarcies; this ability is called permeability. When metamorphosed, sandstone becomes quartzite and limestone becomes marble. These will not let go of the oil, most of which has been squeezed to collect somewhere else.
Salt domes are often places for oil to gather. The largest salt dome in the Gulf of Mexico is larger than the Matterhorn Mountain of Switzerland. Salt from an old dried up ocean when under pressure pierces the overlying sedimentary column, causing much nearby faulting through which oil moves until stopped by a barrier, including the salt itself.
Oil is always measured by a 42 gallon barrel. The imperial gallon of England is 20% larger.
The U.S. Energy Department gave us a rule of thumb recently: each five miles driven at speeds over 60 miles per hour is like paying an additional 20¢ for gasoline per gallon. So, drivers going at 80 miles per hour can save 80¢ per gallon by slowing down to 60 miles per hour.
I broached the idea of a $3.00 tax on a gallon of gasoline in a meeting at Franklin Pierce Law School in Concord, NH about ten years ago, i.e. 30¢ per gallon phased in each year for ten years for a $3.00 total per gallon. One member of the audience said, “If you can get a politician to propose that, I’ll vote for him.”
Last year, Laura Cannoy had a radio program on energy on her regular 9:00 a.m. program. I called in and told her this 30-cents-idea, phased in each year for a total of $3.00 in the tenth year per gallon. She asked her guest, a Boston University Energy Professor, what he thought of this as a way to conserve gasoline. He replied, “This is the best thing I’ve heard yet. But get the politicians to do it.”
In addition to discussing the Athabasca Tar Sands with Sun Oil in the 1960s, and to getting Continental Oil Company to buy Consolidation Coal Company in the 1970s, I used this article’s insightful and factual process to:
1. Suggest to Donald Macdonald, Energy Minister and later Finance Minister, how to turn around its oil industry when in 1974 its idle drilling rigs were all coming south. It took him about three years to see Canada’s drilling activity at record levels, and with several good oil discoveries.
2. Start the Law of the Sea effort about 1963, outlining how the United Nations could give title to leases in the oceans to oil and mineral companies. U Thant’s reply was that, “President Harry Truman had staked out the continental shelves. Beyond that was not worth doing.” About three years later the UN minister from Malta suggested again my idea. Most countries signed, but not the U.S. yet.
3. Encourage International Paper Company to get activity on its mineral rights underlying seven (7) million acres of timberland by joining with a small oil company. This it did successfully.
4. The writer gave these ideas free to all.
Every time you see our beautiful flag waving in the breeze, remember we are in a long energy crisis for the next 30-40 years. We can cooperate in this, or we can buck it. We all want the American flag to continue waving.
N.B. A fine book on energy , A Thousand Barrels a Second, by Peter Tertzakian. That is the best I’ve seen. A DVD, End of Suburbia points up the U.S. dilemma. The Economist for June 21-27, 2008 has a good 14-pages on world energy.
PARAGRAPH CONTENT INDEX
The Big Powers
Energy – problems for legislators
Not the best of times
Need to build nuclear plants
Nuclear waste disposal
Japan – U.S. fuel-rod contract
Russian nuclear bombs
Oil companies and nuclear plants
Continental Oil Company and Consolidation Coal
U.S. electric grid
“Drill offshore” President Bush
U.S. companies control 20% of world oil
70% discovered by U.S. to 1972
Conferences of oil exporters and importers
Asphalt, plastics, clothing
Natural Gas Act of 1956
100 years of coal
Germany’s aviation gasoline from coal
3 – 4% of U.S. energy from alternatives
Tar sands – Canada, Venezuela
$3.00 tax per gallon gasoline
Europe’s tax on gasoline
Small cars – U.S. – 1956
Energy 6% of 1972 U.S. family income
U.S. mineral rights – key
Saudi Arabia – 70%
Middle East – paid in gold
East Texas oil price 10¢
Use of oil, Japan and Germany proxy
Japan and Far East oil – 1938
U. S. oil price control
60 years, U.S. inflation
Cost oil imports 2008, $1 trillion
High prices change habits
Speed – rule of thumb
Pierce Law School
Boston University Professor
Book, DVD, Economist
Turned Canada around in 1974
Started Law of the Sea effort
International Paper Company's Mineral Acreage