oil

High Gasoline Prices and the 2012 Recession, Part II

/ L. M. Walker / 2 Comments


Artificial Demand ::

“Real demand is not artificial. We should resist as much as possible the notion of providing things that are not actually demanded by anyone.” ~ American Consensus

– By: Larry Walker, Jr. –

The price of any product or service is normally determined by two variables, supply and demand. In economics, prices rise as demand increases, as supply decreases, or a combination of the two. It’s only when supply keeps pace with demand that the price of gasoline stabilizes or declines.

Since we know that the world’s population is increasing, not decreasing, more gasoline production is constantly required, not less. It doesn’t take a rocket scientist to figure that out. Thus, the only way to reduce gasoline prices, in the face of rising global demand, is through greater production. Yet, U.S. oil production has been on the rise since 2009, while demand has declined. So, why is gasoline stuck above $3.25 a gallon?

Was there suddenly a great demand for solar panels, biofuels, windmills and electric cars in 2009? The answer is no. Do cars and trucks run on solar panels and wind turbines? The answer is no. Yet, the 2009 stimulus set aside $80 billion in deficit financing to subsidize politically preferred green energy projects, which had little or no demand at the time. In fact, there is little demand for such products today. What the world demanded in 2009 is the same thing it demands today, more gasoline. So why is the federal government involved in providing things that are not actually demanded by anyone?

According to the Energy Information Administration, global oil consumption declined slightly in 2008, 2009 and 2010, while global supply has kept pace with demand (see chart above). In 2010, global supply actually exceeded demand, but as of 2011, the latest statistics available, world demand set a new record of 87,421,000 barrels per day, up from 83,412,000 in 2010. Yet global supply has kept pace with demand. So why have U.S. gasoline prices climbed by more than 90% since January 2009? The answer doesn’t involve oil supply and demand, it has to do with the decline of the U.S. dollar.

The purchasing power of the consumer dollar has declined by 24.3% since 2001 (see chart below). The dollar actually strengthened for a brief 5-month period, from September 2008 to January 2009, but then resumed its decline, having fallen by 8.9% since January 2011. What happened to the price of gasoline during the five-month’s that the dollar strengthened? It declined dramatically, from $3.72 a gallon to $1.64 (see Part I). And what happened to the price of gasoline after January 2011? It shot past the $3.25 per gallon breaking point, where it remains today.

What caused the dollar to decline? The U.S. monetary base, the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank’s reserves, has increased by 324.2% since 2001. The money base grew from $616.7 billion in 2001, to $2.6 trillion as of September 2012. You can see in the chart below, that $256 billion of this increase occurred between January 2001 and September 2008. But from September 2008 to January 2009 the monetary base increased by $858 billion. However, this initial increase actually strengthened the dollar, and was, evidentially, the precise temporary stimulus needed at the time. The only problem with this brilliant strategy was that it wasn’t temporary.

Instead of winding down at the end of January 2009, what had been a well timed temporary stimulus was unfortunately doubled. Since then, the monetary base has been jacked up by another $886 billion. Instead of a temporary stimulus, what we wound up with was a permanent doubling-down of the original amount. Is this what the economy needed? What was the result? This time instead of strengthening, the purchasing power of the dollar plummeted.

Thus, by the time Barack Obama was inaugurated, the economy had already received the temporary stimulus it required. How do we know? The proof is the decline in the price of gasoline, to near its historic inflation adjusted norm of $1.73 a gallon (see Part I). But ever since then, the price of gas has risen from $1.88 to $3.65. That’s the proof. What we have witnessed during the Obama Administration has been reckless and unnecessary deficit-financed spending, which not only added six-months to the Great Recession, but has lead to a prolonged period of stagnation.

The Federal Reserve should have started reducing the monetary base in February 2009, but was unable to, due to the Barack Obama’s unprecedented $832 billion stimulus plan. In addition, as a result of Mr. Obama’s $1 trillion-plus annual budget deficits for the past four consecutive years, instead of being able to control the money base, the Fed has been forced into the unlimited printing of dollars, vis-à-vis QE3.

Based on the current trajectory, what we can expect with another four years of Barack Obama is a continued decline in the purchasing power of the dollar, and higher gasoline prices, in spite of improved U.S. supply and falling demand. The problem with high gasoline prices is they lead to recessions, while lower prices foster economic expansion. The target price for gasoline is the 1992 inflation adjusted price, $1.86 a gallon. The current price is $3.65.

In the midst of the Great Recession, the average price of gasoline only exceeded the breaking point ($3.25 a gallon) for a total of 31 weeks. In contrast, the current price has remained above the breaking point for a total of 86 consecutive weeks, from February 28, 2011 to present. What does that tell you? It leads me to believe that the U.S. is currently in recession. The cause: Inflation due to excessive money printing, necessitated as the result of an $832 billion stimulus, and unprecedented trillion dollar budget deficits due to Barack Obama’s inability to govern. Is there a witness?

One month ago, the Economic Cycle Research Institute (ECRI), the same organization which successfully predicted the last recession, and which over the last 15 years has gotten all of its recession calls right while issuing no false alarms, declared that the U.S. is in recession. In an article entitled, The 2012 Recession: Are We There Yet?, ECRI stated, “Back in December, we went on to specify the time frame for it [the recession] to begin: if not by the first quarter of the year, then by mid-2012. But we also said at the time that the recession would not be evident before the end of the year. In other words, nine months ago we knew that, sitting here today, most people probably would not realize that we are in recession – and we do believe we are in recession.”

The policies of Barack Obama didn’t deliver us from the Great Recession, they prolonged it. The $832 billion stimulus plan merely created an artificial demand for U.S. dollars, and is directly responsible for re-inflating the same imbalances that existed prior to the recession. How can we tell whether or not we’re better off than we were four years ago? Well, here’s what’s different today. We are more than $16 trillion in debt, 25 million Americans are either unemployed or underemployed, instead of reducing the money base the Federal Reserve is printing more money to purchase mortgage-backed debt on an unlimited basis, our tax and regulatory structure is mired in uncertainty, we are suffering from a foreign policy meltdown, and the price of gasoline has remained over $3.25 for a record 86 consecutive weeks.

The Obama Administration has done everything in its power to hide the truth from us, but we’re just not going to take it anymore. Americans can take a lot, but one thing we won’t tolerate is government officials who try to deceive us. The federal government can easily manipulate unemployment statistics, since the numbers are basically made-up anyway, but it cannot so easily engineer the price of gasoline. To do so would entail releasing oil from the Strategic Petroleum Reserve, which is in place to mitigate national emergencies, not sway elections.

Four years of Barack Obama’s policies solved nothing. We are currently teetering somewhere between back where we started from, to worse off than we have ever been. And with a looming fiscal cliff, another four years of Obama will only make things worse. America can’t take another four years of trifling rhetoric, high gasoline prices, or another government-prolonged recession. It’s time to wash our hands of the Obama Administration, and time to turn toward mature, experienced, and responsible leadership. You know what time it is!

“A lie hides the truth. A story tries to find it.” ~ Paula Fox

Reference:

Weekly U.S. All Grades Conventional Retail Gasoline Prices | U.S. Energy Information Administration

The 2012 Recession: Are We There Yet? | Economic Cycle Research Institute

The Malaise of 2012 | Part IV

High Gasoline Prices and the 2012 Recession, Part I

/ L. M. Walker / 1 Comment

Truth is not easily hidden.

– By: Larry Walker, Jr. –

Conventional retail gasoline averaged $3.65 a gallon in the most recent week ended October 22, 2012, yet when Barack Obama was sworn into office the price averaged $1.88. When questioned about the 94.2% increase which occurred on his watch, Mr. Obama remarked that the reason gasoline prices were so low when he entered office was because the U.S.was “in the middle of an economic depression.” However, the question wasn’t why prices were so low when he entered office, but rather why they ballooned by 94.2% on his watch. We’re still awaiting his answer.

In the second presidential debate, Barack Obama stated that, “oil imports are at the lowest levels in 16 years.” But as I pointed out in Debate 2 | Obama’s Oil & Gas Rhetoric, the gasoline I need to fill my tank only cost an average of $1.23 a gallon in 1996, the equivalent of $1.81 today. And later in the same debate, Obama proclaimed that, “oil imports are down to the lowest levels in 20 years.” Well, which is it Mr. President? I pointed out in the same post, that the 1992 price of regular unleaded averaged $1.13 per gallon, the equivalent of $1.86 today. Is the price of gasoline $1.81 to $1.86 today? No. So then what was Obama’s point?

Are we supposed to believe that it took an economic depression to bring gasoline prices down to $1.88 in the week ended January 19, 2009, when that would actually have been higher than the average inflation adjusted price of $1.73 at that time? I don’t know what that tells you, but it tells me that gas prices were in a bubble before the Great Recession, a bubble which finally burst during month 8 of the 19-month downturn. High gasoline prices were actually one of the factors leading to the Great Recession, the subsequent decline merely brought prices in-line with the historic norm.

If this is true, then hasn’t the price of gasoline been in the midst of another bubble since 2011 (see chart below)? And if a bubble currently exists, does that mean the U.S. is either in or near recession? To know the answers, we must venture back in time and analyze what actually took place prior to the Great Recession. The following analysis focuses on all grades of conventional retail gasoline.

Gasoline Prices and the 2001 Recession

Gasoline prices generally rise during the first six months of the year, and fall during the remainder. The 2001 recession began in March and ended in November, as indicated by the first shaded area in the chart above. Going back to January 1, 2001, according to the U.S. Energy Information Administration, we find that conventional grades were selling for an average of $1.42 per gallon. Once the recession commenced prices peaked at $1.70 in May, before the normal seasonal decline. But due to the recession, followed by a post-911 reduction in demand, prices continued to fall reaching a low of $1.08 by the week ending December 18, 2001. This represented a decline from the peak of roughly 36%, over 32 weeks.

Based on the 1992 price per gallon of $1.13, the 2001 equivalent price should have been $1.43 (as represented by the solid blue line). Due to the recession, gasoline prices temporarily declined below the inflation adjusted level, but would eventually regain equilibrium, reaching $1.46 towards the end of 2002. All in all, gasoline prices remained at or near equilibrium between 2001 and 2003. It was in 2004 when prices began to spin hopelessly out of control. The reason for the subsequent price hike was initially blamed on a significant number of refineries being offline, and later by rising crude oil prices.

Prior to the Great Recession, a record high of $3.25 per gallon was set in the week ended May 21, 2007. The chart above contains a green dashed-horizontal line at the breaking point, the pre-Great Recession record of $3.25 a gallon. The solid blue line represents the annual inflation adjusted price of 1992 gasoline. Although gas prices may currently be on the decline, until they dip below $3.25 a recession threat remains. At the same time, any price above $1.86 is not optimal. So where are we today?

Gasoline Prices and the Great Recession

The Great Recession commenced in December of 2007. At the time, gasoline was averaging $3.03 per gallon, but within the first eight months the price would set a new record of $4.10 per gallon in the weeks ending July 7 and July 14, 2008 (see chart above). But then something phenomenal happened. From the peak, prices declined to $3.17, or to below the $3.25 breaking point within just 14 weeks. And prices continued to fall all the way to a low of $1.64 by the week ending December 29, 2008, within another 11 weeks. So from peak to trough, gasoline prices declined by 60% in just 25 weeks, a notable difference from the 36% decline over 32 weeks at the end of the 2001 recession.

After the 2001 recession prices remained relatively stable for two years, but that wasn’t the case with the Great Recession. This time, when prices hit bottom the recession wasn’t over. It probably should have been over at that point, and perhaps it would, had it not been for artificial demand, induced by an unprecedented amount of deficit-financed government intervention. By the time the Great Recession ended, the price of conventional gasoline had risen from a bottom of $1.64 to $2.64. So from an early Great Recession surge to $4.10, prices finally flushed out at $2.64.

To summarize, during the Great Recession, gasoline prices rose by 35% before declining by 36%. By comparison, during the 2001 recession, prices rose by 20% before declining by 36%. That seems fairly harmless on its own, but what’s missing is the fact that gasoline prices doubled, from $1.50 to $3.08, during the previous recovery, between January 2004 and December 2007. That’s the key. There’s the bubble. So what was the cause?

According to information from the U.S. Energy Information Administration, there was a notable rise in U.S. petroleum demand, and a corresponding decline in U.S. supply from 2004 to 2007, as indicated by the shaded area in the chart below. In fact, the phenomenon of rising demand and declining supply actually commenced in 1986.

A quick study of the chart leads to two questions. Is the U.S. currently producing more oil than it did in 1985? The answer is no. Is the U.S. consuming more petroleum than it did in 1985? The answer is yes. Yet in 2009 there was a noticeable decline in demand and a corresponding uptick in supply, the combination of which contributed to lower prices at the pump. And, it appears that U.S. oil supply is continuing to trend upward, while demand has leveled off. So since demand is stable and supply is increasing, gasoline prices should be dropping like a rock, but instead we have witnessed a 94.2% price increase since January 20, 2009.

So was Obama right to blame the 94.2% price hike, on what he refers to as the extraordinarily low prices he inherited as a result of an economic depression? No, because by inauguration day the price of gasoline had settled right about where it should have, on an inflation adjusted basis. Recall that in 1992 the price of regular unleaded gasoline was $1.13 per gallon, which would have been equivalent to $1.73 in 2009; and the national average was $1.64 on December 29, 2008, and $1.88 on January 19, 2009. Thus, at that time, the price of gasoline was barely above its inflation adjusted value (see the first chart).

Going back to the original question, the reason prices have risen on Obama’s watch has nothing to do with supply and demand. The root cause is unprecedented government intervention vis-à-vis his $832 billion stimulus plan (see Part II). The stimulus program merely re-inflated a price bubble that existed prior to the recession, the first caused by lack of supply, and the second by devaluation of the dollar. It was this artificial deficit-financed demand that caused gasoline prices to rise from the $1.88 he inherited to $2.64 by the end of the recession, so that by June of 2009, gasoline was only 19% below its pre-recession record of $3.25.

Gasoline would remain below $3.00 from June 2009, until the week ending December 27, 2010. It was during this period that the economy showed its most promising signs of recovery. But ever since then, the price of gasoline has never fallen below $3.00. Instead, in the week ended February 28, 2011 the price once again accelerated past the $3.25 breaking point, where it has remained for the last 86 consecutive weeks.

With regard to 2010 being the end of the Obama recovery, the proof is that Real Gross Domestic Product (GDP) contracted by -3.1% in the year 2009, as gasoline prices surged from $1.64 to $2.62. Then in 2010, GDP grew by 2.4% as prices stabilized and remained below $3.00. But economic growth again slowed to a rate of 1.8% in 2011, as prices climbed above $3.25. GDP further slowed to a growth rate of just 1.3% through the second-quarter 2012, as gas prices remained above $3.25.

Note: The third-quarter 2012 advance estimate that GDP grew by 2.0% is just that, an estimate. In fact, according to the Bureau of Economic Analysis, “the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The “second” estimate for the third quarter, based on more complete data, will be released on November 29, 2012.”

Continued: High Gasoline Prices and the 2012 Recession, Part II

Reference:

Weekly U.S. All Grades Conventional Retail Gasoline Prices | U.S. Energy Information Administration

The 2012 Recession: Are We There Yet? | Economic Cycle Research Institute

The Malaise of 2012 | Part IV

Photo Via: Midwest Energy News

Debate 2 | Obama’s Oil & Gas Rhetoric

/ L. M. Walker / 1 Comment

Forget Fact Checking: Where’s the Logic?
– By: Larry Walker, Jr. –
In a real town hall meeting, the person asking a question gets to follow up. What we saw Tuesday night wasn’t a town hall meeting at all. The readers appeared to be simply mouthing someone else’s prearranged questions. There wasn’t any passion. But what if the public was allowed to retort? Following are my thoughts on the lecture Barack Obama provided in response to the second question, a rather simple one which he has yet to answer.
QUESTION: Your energy secretary, Steven Chu, has now been on record three times stating it’s not policy of his department to help lower gas prices. Do you agree with Secretary Chu that this is not the job of the Energy Department?

OBAMA: The most important thing we can do is to make sure we control our own energy. So here’s what I’ve done since I’ve been president. We have increased oil production to the highest levels in 16 years.
Natural gas production is the highest it’s been in decades. We have seen increases in coal production and coal employment. But what I’ve also said is we can’t just produce traditional source of energy. We’ve also got to look to the future. That’s why we doubled fuel efficiency standards on cars. That means that in the middle of the next decade, any car you buy, you’re going to end up going twice as far on a gallon of gas. That’s why we doubled clean — clean energy production like wind and solar and biofuels.
So by the middle of the next decade, or around the year 2025, if I’m in the new car buying market at the time, I’ll be able to go twice as far on a gallon of gas. But, since a gallon of gas today costs more than twice what it did four years ago, we’re already at net zero. Mr. President, I was talking about today, right now, not 13 years from now or sometime after I’m dead and gone. And what exactly do coal, wind and solar have to do with the price of gasoline? Retail gasoline prices are sitting at a national average of $3.77 a gallon, just $0.33 off the all time high of $4.10 set in July 2008 (see chart above).
And all these things have contributed to us lowering our oil imports to the lowest levels in 16 years. Now, I want to build on that. And that means, yes, we still continue to open up new areas for drilling. We continue to make it a priority for us to go after natural gas. We’ve got potentially 600,000 jobs and 100 years worth of energy right beneath our feet with natural gas.
Oil imports may be at the lowest levels in 16 years, but the gasoline I need to fill up my tank only cost an average of $1.23 a gallon in 1996, which would be equivalent to around $1.81 today, yet I’m paying around $4.00. Is the reason gasoline cost so much today perhaps the result of fewer imports? And as far as natural gas goes, can I fill up my tank with that tomorrow morning?
And we can do it in an environmentally sound way. But we’ve also got to continue to figure out how we have efficiency energy, because ultimately that’s how we’re going to reduce demand and that’s what’s going to keep gas prices lower.

We can drill for oil in an environmentally sound way? What does that mean? And what do you mean by ultimately reducing demand? How far away is that, longer than four years? Although it’s true that less demand can result in lower prices, it only works if supply remains constant or increases. But if both supply and demand are cut at the same time, then consumers won’t realize any price change at all. And if demand declines too rapidly, then many suppliers may be forced out of business. And then what will we do?
[The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.]
Now, Governor Romney will say he’s got an all-of-the-above plan, but basically his plan is to let the oil companies write the energy policies. So he’s got the oil and gas part, but he doesn’t have the clean energy part. And if we are only thinking about tomorrow or the next day and not thinking about 10 years from now, we’re not going to control our own economic future. Because China, Germany, they’re making these investments. And I’m not going to cede those jobs of the future to those countries. I expect those new energy sources to be built right here in the United States.
Mr. President, I don’t need you to tell me what Governor Romney’s plan is, he can do that himself. The question was: Do you agree with Secretary Chu that it’s not the job of the Energy Department to help lower gas prices? So it seems your answer is that I need to be thinking about 10 years from now, and forget about how I’m going to get to and from work today, tomorrow, next week, or even four years from now. I see. And you’re willing to cede the jobs of the present in hopes that jobs of the future will be based on your present day policies, which for all we know might be considered archaic a month from now.
That’s going to help Jeremy get a job. It’s also going to make sure that you’re not paying as much for gas.
What’s going to help Jeremy get a job, a policy geared to kick in by the middle of the next decade? In the meantime I guess poor Jeremy will have to get by on two or three McJobs, and hope he makes enough to cover the cost of getting to and from work. So is that it? Are you finished?
CROWLEY: Mr. President, let me just see if I can move you to the gist of this question, which is, are we looking at the new normal? I can tell you that tomorrow morning, a lot of people in Hempstead will wake up and fill up and they will find that the price of gas is over $4 a gallon. Is it within the purview of the government to bring those prices down, or are we looking at the new normal?

OBAMA: Candy, there’s no doubt that world demand’s gone up, but our production is going up, and we’re using oil more efficiently. And very little of what Governor Romney just said is true. We’ve opened up public lands. We’re actually drilling more on public lands than in the previous administration and my — the previous president was an oil man.
Wait, so world oil demand and our production are going up? But you just said that our ultimate goal is to reduce demand in order to keep gas prices lower. So if the supply and demand of oil is going up, and you’re drilling more than the last administration, then how is this achieving your goal? And actually very little of what you just said is true. According to the U.S. Energy Information Administration production of finished motor gasoline is trending downward, not up (see chart above). Maybe this is why gasoline prices are hovering near historic highs? After all, we’re not talking about jet fuel and diesel, are we?
And natural gas isn’t just appearing magically. We’re encouraging it and working with the industry.
Can I fill up my car with natural gas tomorrow morning? Because if I could, that would truly be magical.
And when I hear Governor Romney say he’s a big coal guy, I mean, keep in mind, when — Governor, when you were governor of Massachusetts, you stood in front of a coal plant and pointed at it and said, “This plant kills,” and took great pride in shutting it down. And now suddenly you’re a big champion of coal.
Maybe Romney’s a big champion of jobs, unlike you Mr. President. At least he’s got a plan to create 12 million jobs in four years to eliminate the current jobs deficit. Where’s yours?

So what I’ve tried to do is be consistent. With respect to something like coal, we made the largest investment in clean coal technology, to make sure that even as we’re producing more coal, we’re producing it cleaner and smarter. Same thing with oil, same thing with natural gas.
Yeah, consistently wrong. The question wasn’t about coal, clean coal or natural gas, you we’re specifically asked to comment on the Energy Departments role in keeping gasoline prices affordable.
And the proof is our oil imports are down to the lowest levels in 20 years. Oil production is up, natural gas production is up, and, most importantly, we’re also starting to build cars that are more efficient.
So now you’re saying that oil imports are down to the lowest levels in 20 years. A minute ago you said 16 years. Let’s see, so that would be 1992, right? In 1992 the price of regular unleaded gasoline averaged $1.13 per gallon, which would be equivalent to $1.86 today. So if oil production is up, oil imports are down, and they’re building more efficient cars, then why am I still paying close to $4.00 a gallon at the pump?
And that’s creating jobs. That means those cars can be exported, ’cause that’s the demand around the world, and it also means that it’ll save money in your pocketbook.
So by producing more efficient cars, America will someday be able to export them to Libya, Egypt, Iraq, Iran, Greece, Spain and such, and this will create jobs and save money in my pocketbook. Well, that’s interesting, albeit illogical.
First of all, switching over from the production of less efficient to more efficient cars doesn’t add any net jobs, because as new jobs are created, old ones are destroyed. It’s at best a zero sum game, and perhaps even worse looking at the latest green energy failure. The electric-car battery producer, A123 Systems, Inc. filed for bankruptcy just hours ahead of your wishful thought. How many is that? Looks like around 16 so far, see

Obama’s List Of Failed Green Energy Jobs & Companies.

Secondly, as far as saving money in my pocketbook, what’s a pocketbook? It seems that you’re either talking about something way off in the distant future, or the archaic past, but the question pertains to right now, today, within my lifetime.
OBAMA: That’s the strategy you need, an all-of-the-above strategy, and that’s what we’re going to do in the next four years.
No Mr. President, that’s not the strategy I need. What I need is for gasoline prices to drop by at least half of where they are today. So do you agree with Secretary Chu that it’s not the job of the Energy Department to help lower gasoline prices or not? Will gasoline prices be half what they are today if you get reelected, or twice as high? Oh never mind, I’m leaning heavily towards the other guy anyway. I can make sense out of Romney’s policies, but as for yours, the record speaks for itself.
References:

Ends of the Green Agenda

/ L. M. Walker / 3 Comments

Costs of Algae Biofuel

* By: Larry Walker, Jr. *

Detective Thorn: It’s people. Soylent Green is made out of people. They’re making our food out of people. Next thing they’ll be breeding us like cattle for food. You’ve gotta tell them. You’ve gotta tell them! ~ Memorable quotes from Soylent Green *

The U.S. Energy Information Administration (EIA) reported that gasoline prices have risen from an average price of $1.61, in the week ending December 29, 2008, to $3.72, as of the week ending February 27, 2012 (see chart above). So with gasoline prices on a tear having risen by 131% just since December 29, 2008, biofuel enthusiasts have once again arisen from the sludge, this time proclaiming that algae biofuel is the answer to our energy needs.

According to Marine Corps Times, in 2009 the U.S. Navy paid $424.00 per gallon for 20,055 gallons of biodiesel made from algae, which set a world record at the time for the cost of fuel. Are you kidding me? In the midst of the worst recession since the Great Depression, the Navy thought that paying $424.00 per gallon for algae biodiesel while petroleum based diesel was selling for an average of $2.50 per gallon was somehow smart?

Then, in December of 2011, according to Defense News, the U.S. Defense Department signed a contract to buy 450,000 gallons of biofuel – the largest purchase ever by the federal government – to power the U.S. Navy’s “green” carrier strike group. The blend of used cooking oil and algae will be mixed with traditional fuels to help power the carrier strike group during military exercises this summer in the Pacific Ocean. The $12 million purchase works out to about $26.00 per gallon.

More recently, on February 27, 2012, House Armed Services Committee member Randy Forbes had harsh words for Navy Secretary Ray Mabus, saying he was focusing too much on alternative fuel development and not enough on sailors and ships. Forbes says biofuel costs four times as much to manufacture as fossil fuel, and that’s something the Navy can’t afford now. “That’s why I said ‘Mr. Secretary, with all due respect, you’re not the Secretary of Energy, you’re the Secretary of the Navy,'” stated Forbes.

Although, in the second purchase, no breakdown was provided for the cost of algae biofuel by itself, it’s obvious that the cost per gallon has dropped dramatically over a two year period. But it’s doubtful that this would have occurred without massive government stimulus through agency purchases such as by the U.S. Navy, as well as loan guarantees and grants from the U.S. Department of Energy. But with the price of petroleum based diesel fuel currently selling at around $4.00 per gallon, does it make sense for our military to be purchasing fuel which costs six-and-one-half times more? Well, let’s just hope we don’t get involved in major war anytime soon.

A peek at the algae biofuels production process. [Image Source: Solix Biofuels]

The Cost of Converting to Algae Biofuel

In his paper entitled, “Widescale Biodiesel Production from Algae,” Michael Briggs, of the University of New Hampshire, Physics Department, lays out some of the costs of replacing our dependence on oil with algae biofuel.

“First, consider if you will, a treaty between the United States and Mexico, where Mexico grants the U.S. a permanent right-of-way to the Gulf of California for the purpose of building a seawater canal that will transport a large and continuous flow of seawater from the Gulf of California into the USA. For the sake of discussion, let us assume that a canal has already been built between the Gulf of California and the Salton Sea; and that the Salton Sea will serve as a transfer reservoir.

Now, visualize a large aqueduct between the Salton Sea and Death Valley where a second inland sea has formed, approximately the size of the Salton Sea. From these two inland seas, several aqueducts extend out into the deserts of the Southwestern United States; Reaching into Arizona and Nevada.

Of the many and various desert farms, ranches and communities served by the aqueducts, there will be forty-thousand algae farms, having a total water surface area of 250 acres each. Two-hundred and fifty acres multiplied by forty-thousand farms equals a total of ten million acres of shallow water algae ponds, dedicated for the purpose of growing non-food renewable biomass for the production of transportation fuels.”

Sure Mr. Briggs, I am trying to envision the federal government building a canal from the Gulf of California to the Salton Sea, but I’m having a little trouble because I’m wondering why it hasn’t been able to secure our Southern border, and I’m also pondering the $16 trillion federal debt, pending construction of California’s $53 billion Bullet Train to nowhere, and the government’s unwillingness to move forward with the privately funded Keystone XL pipeline.

Note: The costs of constructing the necessary seawater canal, aqueducts and reservoir outlined above are not included in Mr. Briggs’ cost estimates which follow.

Capital Requirements

  • 1 hectare = 2.47 acres. Michael Briggs gave an estimate of $80,000 per hectare for the construction costs to build the algae ponds.
  • $80,000 divided by 2.47 = 32,390 rounded. We will say $32,500 per acre.
  • $32,500 times 250 acres = $8,125,000 construction costs for a 250 acre algae farm.
  • $8,125,000 times 40,000 farms = $325,000,000,000 to construct ten million acres of algae ponds.

Note: That’s a total of $325 Billion to construct the required 10 million acres of algae ponds. This does not include the costs of building a seawater canal from the Gulf of California to the Salton Sea, or the costs of constructing an aqueduct from there to an inland reservoir in Death Valley. Neither does it include the costs of constructing the many distributed biorefineries that will be needed to process the algae into biodiesel.

Operating Expenses

Mr. Briggs also provided an estimate of $12,000 per hectare for operating costs (including power consumption, labor, chemicals, and fixed capital costs).

  • $12,000 divided by 2.47 = 4,860 rounded. We will say $5,000 per acre for operating costs.
  • $5,000 times 250 acres = $1,250,000 annual operating costs for a 250 acre algae farm.

Annual Production

The University of New Hampshire Biodiesel Group also provided the following information on their Algae ponds:

“Micro algaes present the best option for producing biodiesel in quantities sufficient to completely replace petroleum. While traditional crops have yields of around 50-150 gallons of biodiesel per acre per year, algaes can yield 5,000-20,000 gallons per acre per year. Algaes grow best off of waste streams. Agricultural, animal, or human. Some other studies have looked into designing raceway algae ponds to be fed by agricultural or animal waste. We are now pursuing funding to investigate redesigning wastewater treatment plants to use raceway algae ponds as the primary treatment phase. With the dual goal of treating the waste and growing algae for biodiesel extraction. We also plan to investigate the possibility of using the algae mush (what is left after extracting the oil) as a fertilizer.”

An estimate of 5,000 to 20,000 gallons per acre per year is a rather wide discrepancy. Apparently seawater doesn’t provide enough nutrients to grow micro algae. Algaes grow best off streams of human, animal and agricultural waste. Wait; did he just say human waste?

In his paper, under the section titled: “How much biodiesel,” Mr. Briggs concluded that 140,800,000,000 (140.8 billion) gallons of biodiesel could replace 100% of the petroleum transportation fuels consumed in the United States annually, without requiring a big change in driving behavior or automotive technology. Although he did assume everyone would switch to diesel engines because of the superior efficiency of diesel compared to gasoline engines.

  • 140.8 billion gallons divided by ten million acres = 14,080 gallons per acre (per year). We will say 15,000 gallons per acre (per year).

Note: The costs of converting all gasoline powered engines to diesel were also omitted from Mr. Briggs’ cost estimates.

Operating and Capital Costs

Based on Michael Briggs’ estimates, an algae farm with 250 acres of pond surface area would have $1,250,000 in annual operating expenses.

  • 15,000 gallons per acre times 250 acres = 3,750,000 gallons per algae farm per year.
  • $1,250,000 divided by 3,750,000 gallons = 33.3333 cents per gallon in operating costs.

How much will it cost to pay off the $32,500 per acre loan for the initial construction costs (the $80,000 per hectare)? That is: $32,500 times 250 acres = $8,125,000 construction costs for a 250 acre algae farm.

Let us assume a zero Interest federally insured loan spread over 20 years with a single payment of 1/20th of the principle due each year.

  • $8,125,000 divided by 20 years = $406,250 cost of debt per year per 250 acre algae farm.
  • $406,250 divided by 3,750,000 gallons = 10.8333 cents per gallon cost of debt (at 15,000 gallons per acre).

If the annual yield is 15,000 gallons per acre, then the cost of producing algae biodiesel feedstock would be .442 cents (10.8333 + 33.3333) per gallon. Multiplying this by 42 = $18.56 per barrel of oil equivalent.

Finally, if each farm earned .10 cents per gallon profit, then:

  • 15,000 gallons times 250 acres times 10 cents = $375,000 per year net earnings.

This would bring the total cost of algae crude to .542 (.442 + .10) cents per gallon, or $22.76 per barrel of oil equivalent.

Summary

Although a cost of $22.76 per barrel of oil equivalent sounds great, it doesn’t include the following costs:

  • Building a massive seawater canal from the Gulf of California to the Salton Sea, and then constructing a series of aqueducts from there into a reservoir in Death Valley. How much will that cost, and who will foot the bill?

  • Constructing the many distributed biorefineries that will be needed to process the algae into biodiesel, without which this scheme is all for naught. How much will this cost? Who’s going to put up the capital?

  • Converting all gasoline powered engines to diesel. Who’s going to cover this?

Aside from the above omissions, who will front the $325 Billion initial capital expenditure for construction of the algae farms? And what’s going to happen if production estimates per acre fall short of the required 15,000 gallons?

Since the federal government is officially broke, and unable to fund construction of a massive seawater canal, system of aqueducts, and the necessary reservoir, it sounds like the least costly and most efficient scenario for algae biofuel lies in finding a way to pump all of our raw sewage – human, animal and agricultural – directly to the proposed algae farms.

It turns out that using raw sewage is the best way to ensure the most bang-for-the-buck out of each algae farm. But won’t raw sewage attract rodents and create other ecological problems? Perhaps, but who cares about that? Just toss the looming hordes of tadpoles and sewer rats into the refining vats as well.

While everyone has been focusing on the means of the green agenda, don’t its ends lead to the recycling of all things, including eventually human beings? That’s been pretty clear since the 1972 production of Soylent Green. Anyways, for now, Green energy enthusiasts may have to settle for converting renewable human waste into algae biofuel.

I can imagine, sometime in the near future, a Charlton Heston type (Detective Thorn in Soylent Green) crying out with his last breath, “It’s poo-poo. Algae Biofuel is made out of poo-poo. They’re making our fuel out of poo-poo. You’ve gotta tell them. You’ve gotta tell them!” Yeah, yeah, we know, just follow the sewer rats.

In the meantime, for me anyway, a little more gasoline production will suffice. Can we please, please, exhaust America’s God-given natural resources before we start breaking out the Soylent Green? And no Mr. Obama, Step one is “Drill”, Step two is “Baby”, and Step three is “Drill”. You got that?

War on Wealth, Part II | Keeping Our Foot on the Gas

/ L. M. Walker / 1 Comment

* Pieces of the Keystone XL pipeline await construction in South Dakota. Via: North Platte Post *

By: Larry Walker, Jr. –

When Mr. Obama visited the padlock maker Master Lock in Milwaukee, on February 15, 2012, he drew the following conclusions. He said, “Manufacturing is coming back. Companies are starting to bring jobs back. The economy is getting stronger. The recovery is speeding up. We’re moving in the right direction. And now we have to do everything in our power to keep our foot on the gas.” So in keeping with my fact based approach, I have to ask, Are Mr. Obama’s claims reasonable? Let’s run down the list.

“Manufacturing is coming back. Companies are starting to bring jobs back.”

First of all, in my last post, War on Wealth | Obama Visits Master Lock, I pointed out that the United States has lost more than 6.0 million manufacturing jobs since 1990, and almost 1.0 million of those have been lost since Obama’s inauguration (see chart above). That’s hardly indicative of a manufacturing boom. And since Master Lock only brought back an alleged 100 jobs from China, that’s hardly proof of companies bringing jobs back. It would have been more accurate to state, although less of a reason to re-elect Mr. Obama, that one U.S. company brought back 100 jobs from China.

“The economy is getting stronger. The recovery is speeding up.”

Next, according to the Bureau of Economic Analysis, GDP declined at an annual rate of (3.5%) in 2009, increased at an annual rate of 3.0% in 2010, and then slowed to an annual rate of just 1.7% in 2011 (as of 1/27/2012). So since our economy declined from an annual growth rate of 3.0% in 2010, to an annual growth rate of just 1.7% in 2011, does this mean the economy is getting stronger? Not in my book. So instead of backing Obama’s claim, that the recovery is speeding up, the facts show that the recovery is actually slowing down (see chart above).

“We’re moving in the right direction.”

Are we moving in the right direction? Well, in terms of deficit spending, the government is borrowing at the highest rate of GDP since World War II, as shown in the chart (above). The national debt as a percentage of GDP has skyrocketed from 69.9% in 2008 to 104.8% in 2012, and is projected to reach 107.8% by 2014. The last time our debt-to-GDP ratio surpassed 100% was in 1945, when the federal debt climbed to 116.6% of GDP, peaking at 121.9% in 1946.

We know where the money was spent during the Second World War, but where’s the $5 trillion Obama borrowed and spent? For God’s sake, we could have cured cancer, or built a colony on the Moon with that kind of dough.

In terms of the near record debt-to-GDP ratio, coupled with the continuing loss of manufacturing jobs and the year-over-year decline in GDP, I conclude that the United States is moving in the wrong direction.

“And now we have to do everything in our power to keep our foot on the gas.”

Wait a minute; did Mr. Obama dare mention the word gasoline in his delusional tirade? When I first heard this, I wondered for a minute whether he really meant to say, ‘And now we have to do everything in our power to keep our boot on the neck of U.S. oil and gas producers.’

According to the U.S. Energy Information Administration (EIA), gasoline prices have risen from an average price of $1.61 in the week ending December 29, 2008, to $3.52 through the week ending February 13, 2012 (see chart above).

So since gasoline prices have risen by 118.6% under the Obama Administration, perhaps we should be doing everything in our power to remove the federal government’s dead cold foot from the gas pedal. Gasoline prices are expected to rise further, to $4.50 per gallon by this summer, which may give Mr. Obama a temporary victory in his War on Wealth, but fortunately for America, his chance of re-election will simultaneously run out of gas.

To the contrary, instead of being a time to continue recklessly forward, our foot glued to the accelerator, now is the time for America to pull over to the pits for refuelling, new tires, repairs, mechanical adjustments, and a driver change. The replacement of Mr. Obama with a truly Conservative POTUS is imminent. And just so you don’t get the wrong idea, no, I’m not suggesting as a substitute the severely moderate Mitt Romney. [But I’ll back Mr. Romney in a heartbeat over another four years of Obama.]

References:

– A Crude Hit to the Recovery

– 18 Statistics That Prove That the Economy Has Not Improved Since Barack Obama Became President

Related:

– War on Wealth | Obama Visits Master Lock

– Manipulation 201: Playing With Unemployment

– Drill Here, Drill Now | Facebook Petition

Obama on Oil | Living a Lie

/ L. M. Walker / Leave a comment

Trust The Lies

“We’re actually producing more oil here than ever.” ~ Barack Obama (05/06/2011) ~

The truth: We are producing fewer barrels of oil here than we did in 1951. ~

Obama would be correct, if our nation was founded in the year 2003. But of course anyone born before 2003 knows that Obama’s statement is – in fact – not true. For those more interested in truth, than in the shallow words of lying politicians, we are actually producing fewer barrels of oil today than we produced in the year 1951, and 42.3% fewer than we produced in 1970.

It’s time to start drilling, and time to stop lying. If Obama won’t do it, then let’s find someone who will.

References (Check the facts):

http://tonto.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=A

http://www.eia.doe.gov/totalenergy/data/monthly/pdf/sec3_3.pdf

Progressive Regression | Gulf Oil Disaster

/ L. M. Walker / Leave a comment

Government Regulation vs. Self-Regulation

– By: Larry Walker, Jr. –

The Progressive Obama Administration’s magical solution for all problems American is more government regulation. But is government regulation really better than self-regulation?

Companies like BP have a direct interest in the safe, efficient drilling and harvesting of oil. Would it benefit a private oil company like BP to carelessly blow up its own oil well and lose millions of gallons of the precious black gold into the sea? No. Did it benefit Exxon to crash the Valdez and leak millions of gallons of oil off the coast of Alaska? No. So every company has a direct interest in self-regulation.

Sure, accidents will happen. And when accidents happen, private companies will pay the price under applicable Federal and State laws. Many private sector executives have even found themselves behind bars when laws were violated. But what happens when government regulators screw up?

On May 27, 2010, Elizabeth Birnbaum, the former head of the Minerals Management Service (MMS), which is charged with monitoring and regulating offshore drilling, simply resigned.

On May 17, 2010, Chris Oynes, the associate director of Offshore Energy and Minerals Management at the Minerals Management Service simply announced that he was moving up the date of his retirement to May 31, 2010.

On May 11, 2010, Frank Patton, an unlicensed Minerals Management Service (MMS) engineer, who approved the plans for the Deepwater Horizon’s blowout preventer just four days before the blowout, admitted that he did so without ever seeing the blowout preventer plans. He further admitted that he has never seen any such documents on the more than 100 approvals his office issues each year. MMS regulation 250.416(e) requires would-be drillers to submit proof that the blowout preventer they are using to shut off the well will have enough power to shear a drill pipe in case of an emergency, but Patton was apparently unaware of this particular regulation. As far as we know, Patton will keep his job, and will probably get a promotion.

In September of 2006, Interior Department Inspector General, Earl Devaney told a House panel that the Minerals Management Service failed to include price triggers in leases signed with oil companies in 1998 and 1999. The Government Accountability Office estimated that the total cost to taxpayers during the two year period was over $10 billion, yet government officials once again were able to pass the buck.

The point is that U.S. taxpayers have been paying billions of dollars (that we don’t have) annually, for more and more government regulation, yet when it comes time to hold the government accountable we find that they are not.

Barack Obama, and his Progressive minion’s solution to every problem American is more government regulation. I see this cowardly pat answer as just another way of passing the buck. Should we feel confident when Obama, who’s on his way to going down as the worst president in American history, boldly declares that ‘the buck stops with him’? Obama, like his predecessor’s, will be long gone when it is discovered just how badly he screwed up.

In reality, and in general, all that government regulation does is to increase taxes in many forms (income, excise, fees, fines), which in turn makes products and services more expensive for all American consumers; and it creates a layer of unaccountable bureaucrats, who ultimately make us all less safe, secure and prosperous.

Progressive Obama worshippers say that we need more government regulation. I say we need less. It would benefit all Americans to begin dismantling our huge governmental bureaucracy. Increasing the size and scope of government regulation has not historically benefited a single soul, and it never will.

Less Government regulation leads to lower taxes, lower consumer prices, greater accountability, more freedom, and more wealth creation opportunities. What exactly did we get for all the money spent on regulating oil drilling in the Gulf of Mexico?

Patton’s Folly: Is MMS Indictable for Gulf Disaster?

/ L. M. Walker / 1 Comment

Frank Patton - the unlicensed MMS engineer who approved Deepwater Horizon Plans on Apr 16, 2010

By: Larry Walker, Jr.

Frank Patton (left), the unlicensed Minerals Management Service (MMS) engineer, who approved the plans for the Deepwater Horizon’s blowout preventer, actually never saw the plans. Yet, Patton issued his approval on April 16, 2010, just four days before the blowout.

During the oil rig explosion hearings held in mid-May, Patton admitted that he has never asked for, nor reviewed, blowout preventer plans on any of more than 100 applications his office approves each year. In fact, Patton stated that he was never instructed that he needed to review such plans.

When asked whether this is standard MMS policy, or just Frank Patton’s policy, Mr. Patton said, “I’m not sure.”

What? You’re not sure?

It’s bad enough that Patton is not a licensed Professional Engineer (PE). (See An Unlicensed MMS Engineer and The Gulf Disaster). But his not knowing why he would need to ask to see the actual blowout preventer plans, before he approves them, is just plain ignorant. Without even looking at the plans, Patton has perhaps approved more than 100 blowout preventers each year. What happened to due diligence? What happened to common sense?

Has the Federal Government gotten so big that one hand doesn’t know what the other is doing? It sure looks that way. Why are Federal employees exempted from being required to hold PE licenses? There’s really no excuse.

It’s time for the Federal government to stop placing all the blame for this disaster on BP, to man-up, and to take responsibility for its own failures. This message is for the House Oversight and Investigations Subcommittee. For God’s sake, open up your eyes, and then start telling the truth for a change.

Following are some excerpts from the oil rig explosion hearings:

Under scrutiny from officials in his own agency, the local Minerals Management Service engineer who approved BP’s application to drill under the Deepwater Horizon admitted that he approved the blowout preventer that failed to stop the Gulf of Mexico oil spill without assurances that its last-ditch mechanism would work on the drill pipe the company was using.

Jason Mathews, an MMS official who sits on the six-member joint Coast Guard and MMS investigative board, questioned Frank Patton, the agency’s New Orleans District drilling engineer, about his approval of BP’s drilling permit. Mathews noted that MMS regulation 250.416(e) requires would-be drillers to submit proof that the blowout preventer they are using to shut off the well will have enough power to shear a drill pipe in case of an emergency.

Those mechanisms on the 450-ton blowout preventer at the bottom of the seabed are called blind shear rams, a pair of high-pressure valves and blades that are supposed to slice through a gushing drill pipe and close off a well leak. But attempts to get those shear rams to operate on the well below the Deepwater Horizon have been unsuccessful since the April 20 disaster.

Patton testified he was not aware of any such requirement and never demands it from more than 100 applications his office reviews each year.

“I have never been told to look for this statement,” Patton said. The BP application had “no information on blind shear rams’ ability to shear the drill pipe used.”

“If they didn’t submit it, why did we approve it?” Mathews asked.

“That is one thing I don’t look for in my approval process,” Patton said. “I’ve never looked for that statement there.”

“Is this just you, or is this MMS-wide? ” Mathews persisted.

“I’m not sure,” Patton said sheepishly.

Source: New Orleans Times-Picayune and An Unlicensed MMS Engineer and The Gulf Disaster

Obama’s Jones-Act Massacre: Updated

/ L. M. Walker / 2 Comments

Dutch Koseq Sweeping Arms vs. Obama’s Jones-Act Disaster

Dutch Sweeping Arms vs. Obama's Jones Act Special

Koseq rigid sweeping arm systems – the best oil recovery equipment for offshore. The only tool for recovery of oil on open sea that works even under severe weather and sea conditions.

Updated: The Dutch offered to loan the U.S. four of these systems on day 3 of the Gulf disaster, but Obama said, “thanks but, no thanks.” Now it’s too late. How long did it take to waive the Jones-Act? Fifty some-odd days? How many lives, jobs, and businesses have been ruined unnecessarily? How much marine life could have been saved had Obama acted sooner? All Obama had to do was waive the Jones Act. All he needed to do was put America first.

Now he owns it. This is Obama’s Jones-Act Massacre.

By the way, since we have several thousand active oil wells in the Gulf of Mexico, exactly how many modern day oil skimmers do we have, on standby, in the region?

I think we need a six-month moratorium on Obama’s big mouth, and then some real change in 2010 and again in 2012.

Illegal Dutch Oil Skimmers, the EPA and the Feckless POTUS

/ L. M. Walker / 3 Comments

Dutch Skimmer with Koseq Rigid Sweeping Arms vs. Obama's Jones Act Special

Compiled by: Larry Walker, Jr.

Two Dutch companies were on stand-by, on May 4, 2010, to help Americans tackle the oil slick in the Gulf of Mexico. The two companies use huge booms to sweep and suck the oil from the surface of the sea. The U.S. Environmental Protection Agency (EPA), however, has difficulties with the method they use.

So it seems that according to the EPA, it’s acceptable to burn millions of gallons of raw crude, sending the harmful waste into the atmosphere, or to dump millions of gallons of toxic dispersant’s into the waters, but it’s not acceptable to actually collect 75-80% of the oil for recycling?

So has Obama stepped in to waive the Jones Act yet? Not quite, but he did sleep at a Holiday Inn Express on the Gulf Coast. Then, like any good community organizer, he excogitated the extortion of $20 billion from BP.

What do the Dutch have that the Americans don’t when it comes to tackling oil spills at sea?

“Skimmers,” answers Wierd Koops, chairman of the Dutch organization for combating oil spills, Spill Response Group Holland.

The Americans don’t have spill response vessels with skimmers because their environment regulations do not allow it. With the Dutch method seawater is sucked up with the oil by the skimmer. The oil is stored in the tanker and the superfluous water is pumped overboard. But the water does contain some oil residue, and that is too much according to US environment regulations.

US regulations contradictory

Wierd Koops thinks the US approach is nonsense, because otherwise you would have to store the surplus seawater in the tanks as well.

“We say no, you have to get as much oil as possible into the storage tanks and as little water as possible. So we pump the water, which contains drops of oil, back overboard.”

US regulations are contradictory, Mr Koops stresses. Pumping water back into the sea with oil residue is not allowed. But you are allowed to combat the spill with chemicals so that the oil dissolves in the seawater. In both cases, the dissolved oil is naturally broken down quite quickly. It is possible the Americans will opt for the Dutch method as the damage the oil spill could cause to the mud flats and salt marshes along the coast is much worse, warns Wetland expert Hans Revier.

“You have to make sure you clear up the oil at sea. As soon as the oil reaches the mud flats and salt marshes, it is too late. The only thing you can do then is dig it up. But then the solution is worse than the problem.”

Senator convinced

On May 4, 2010, a team of around eight men were on stand-by and four skimmers and extra material were ready to be loaded. The local senator is already convinced and is trying to talk the admiral who is coordinating the operation into accepting help from the Netherlands. The answer may be given today (May 4, 2010).

But nothing is certain. In 1989, a Dutch team and equipment had already been flown in to tackle the Exxon Valdez oil tanker disaster off the coast of Alaska. But in the end the US authorities sent them home.

Source: Radio Netherlands

On day 58, I am just wondering exactly which environment the EPA is trying to protect?