Unsustainable Oil Prices

One of the goofier ideas going around these days is that the solution to high gasoline prices is to use the tax code to keep them high. The theory is that by locking us all into high prices, we will encourage the great unwashed to avoid gas guzzlers because they would lock them into, well high gas prices. I suppose there is a certain logic to that for the organic chardonnay and brie crowd but for most of us schmucks there is a better way. Let the market sort it out. There are roles for government in R&D and in emissions and mileage standards but if there is anything to be learned from our disgraceful farm policies it is that price controls are a bad idea whether they be floors or ceilings.

There is a basic long term mechanism for bringing oil prices back into line, competition from alternatives. Anything above about $55 per barrel makes technologies like coal-to-liquid and alga culture economically feasible. Those two sources between them can provide a virtually limitless and environmentally friendly supply of fuel. The fear is that oil may drop back again and bankrupt investors who get too far out in front. But lower oil prices discourage exploration and marginal recovery processes. Petroleum producers can’t satisfy demand unless the money is there, maybe not even if it is there. There is a case for $55 per barrel or thereabouts as the long term equilibrium price.

For obvious reasons the US Air Force wants a reliable domestic source of aviation fuel and has been experimenting with coal-to-liquid production for several years. The result works as well as conventional jet fuel and they would like to see it produced on a commercial scale. To that end they’ve asked congress for long term contracting authority to jump start construction of the necessary refining facilities. They ought to get it. Guaranteeing supplies is not the same as market distorting price controls.

Another suggestion is that the Department of Energy build a refinery and then sell it. DOE did something like that with the Great Plains Synfuels Plant in the 1980’s. Since 2000 the carbon monoxide from that plant has been sequestered and piped 200 miles to a Canadian oil field where it is pumped under ground to enhance oil recovery. Most of it will remain under ground permanently. That should answer any question about whether it can be done and the plant’s owners have paid DOE several hundred million dollars in a revenue sharing arrangement. Unfortunately the twenty year old plant is still the only commercial coal gasification operation in the US. We’ve learned a lot about the technology and it’s time we built another one. I’d like to see one built in Texas. There is a huge lignite field off I45 just north of Centerville that might make an ideal site.

I’d especially like to see multiple plants using competing processes. There are at least three designs ready for use on a large scale. One will most likely prove superior and I’d not want to have DOE or the Air Force deciding the winner in advance. DOE was about to make that mistake with the recently cancelled billion dollar plus FutureGen project. FutureGen would have used up most of the available development dollars on an experiment involving the production of hydrogen, not a prospect for replacing liquid fuel on a large scale any time soon. Now DOE is proposing a series of production facilities to be on line by 2015, without the hydrogen. Predictably the Illinois and Missouri congressional delegations are fighting to keep FutureGen alive. Their states would get most of the money. The rest of us should support the change. A few firm coal-to liquid projects in the pipeline might be just the ticket to burst the speculation bubble that has helped get oil and gas prices so high.