Drilling For Answers on Obama's Claims

Thursday, June 19, 2008

BARACK OBAMA

An Obama fan writes in to defend the candidate in the matter of four recent claims disputed by Hugh Hewitt.

That off-shore oil production would only drop gas prices by a few cents in five years
That an investment of 250 billion dollars five years ago would have produced an engine that didn't require fossil fuels.
That he technology exists to get 100 miles per gallon.
That we could move to 40 MPG fuel standards for cars.

Claim 1: The limited price benefits of offshore drilling. The Obama fan points to this Energy Information Administration report to suggest the price impact would be far off and marginal.

The report assumes that exploration begins in 2012, instead of say, January 2009. (I’m never a fan of the “it will take too long to see benefits” argument. God willing, we’re all going to be here in 2014. The question is, when we reach that date, do we want to have these drills producing oil off American shores or not?)

The study presumes that the difficulty of access is on par with the Gulf of Mexico, and that it would take five years to begin oil production from the sites. I dispute neither of those, although I think it is not unthinkable that it would be easier.

The report states, “Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant.” Wait a minute. Every barrel of oil that is sent to an American refinery from off the coast of, say, Florida, has much lower transportation costs than a barrel from Venezuela, Russia, the Middle East, Nigeria, etc. Oil from faraway sources has higher transportation costs than oil from nearby sources.

“But Jim, the price will still be high because of booming demand in India and China.” Yes, but then the Chinese and Indians would have to pay the added costs of getting the oil from American wells halfway around the world to their consumers.

Besides, very few proponents of offshore drilling believe that this idea alone is the way to reduce gas price. (John Hofmeister, the retiring president of Shell's U.S. operations founder of a new non-profit, Citizens for Affordable Energy almost persuades a skeptical Daniel Gross in Newsweek. Note that the EIA report cited by the Obama fan says that with offshore drilling, domestic crude oil production would only increase from 2.2 million barrels per day to 2.4 million barrels per day, while the natural gas production increases only 1.8 percent higher than keeping the areas off limits to drilling. Gross’ article states, “eliminating the Congressional ban on exploration and production on the coasts and on federal lands that are currently off limits for exploration would allow for the production of oil and natural gas equivalent to about 3 million barrels per day.”)

Also note that Democratic Sen. Chuck Schumer uses the magic math to insist that another million barrels a day from Saudi Arabia would bring the price down by $25 a barrel and 62 cents a gallon, while the exact same amount coming from ANWR would lower prices by a penny.

Two other big steps are expanding refinery capacity (no point in bringing in more oil if you can’t turn it into gasoline fast enough) and getting states to reexamine their addiction to gasoline taxes.

There are many reasons gas is expensive, but a big one is that you can’t drill it out of the ground and just put it in your car. You’ve got to refine it, and 18 states don’t have any oil refineries and nine more have only one.

Now look at the map with all the refineries in the country. (It’s from 2002,but since we haven’t built a new one in decades, it’s still good. )

Now look at the map of gas prices by county.

It’s not an exact match – state taxes play a big role in this obviously — but you’ll notice New England has no oil refineries, and gas prices there are shaded the red and orange colors of the highest prices – about $4.15 and up . Connecticut and New York’s prices stand out as expensive. Only two counties in the Northeast are below $3.95, and lo and behold, they’re in New Jersey – a geographical small state with six refineries. (Also credit where it’s due; the lowest combined federal, state and local taxes in the region.)

States that stand out as comparably cheap include Oklahoma (6 refineries) Texas (27 refineries), Arkansas (2 refineries) and Louisiana (17 refineries). South Carolina has no refineries, but it’s got one just across the state line in Savannah, Georgia.

There are exceptions – California has plenty of refineries, but its residents pay 63.9 cents per gallon in combined taxes, the highest in the nation.Pennsylvania has eight, but their residents pay 50.7 cents per gallon in combined taxes, limiting the price benefits in that state.

Missouri’s gas seems comparably cheap, but it has no refineries. Slate partially attributes this to “its proximity to Texas, Oklahoma, and the Gulf Coast states, Missouri is crisscrossed by some of the nation's larger pipelines. Oil barges also pass through the state on the Mississippi and Missouri rivers. Proximity to producers reduces transportation costs a little, but it also makes Missouri less susceptible to price spikes when individual refineries run into problems.” In perhaps the greatest state-by-state contrast on the map, Missouri’s gas taxes are 36 cents per gallon compared to Illinois’ 57.9 cents.

Bottom line: If your refined gasoline has to be shipped in from out of state, it’s more expensive. Beyond that, the Obama argument that gas prices will be only affected a few cents requires us to believe the law of supply and demand has been repealed, and that increasing supply will not lower the price.

Claim 2: An investment of $250 billion five years ago would have produced an engine that didn't require fossil fuels.

Pointing to Honda’s test-leasing of the FCX Clarity model, which runs on hydrogen, my Obama fan correspondent contends, “I can only imagine how much closer they'd be to actual market if they'd had an extra $250B five years ago.”

I’m not sure they would be that much closer. Yes, the test lease program is for $600 a month. However, the production cost per vehicle is in the “hundreds of thousands of dollars” and that Honda’s president hopes that within ten years they can make it for under $100,000. Presuming they get the production cost down to $200,000, Honda will have to lease each Clarity at that price for about 28 years in order to break even.

Once they do get a hydrogen car available for the consumer market at $100,000 a pop, Honda will face the modest challenge of persuading consumers to buy the Clarity for the cost of three and a half times the average price of a new car.

Claim 3: The technology exists to get 100 miles per gallon.

My Obama fan points to a 2006 article that cited two dozen on America’s roads. Creating these 100 mpg cars required modifying a preexisting hybrid (more expensive than standard cars, obviously) voiding the warranty (good luck!) and do-it-yourself conversion costs of $3,000 to $12,000.

A more recent article describes a conversion of a Prius by a Denver engineer at the the National Renewable Energy Laboratory… at a cost of $70,000. Then, of course, there’s the electricity bill.

These cars don't actually get 100 miles for each gallon put in them; they only use gasoline for traveling more than say, 50 miles per hour. The rest of the time they're running on electricity, and get plugged in at night. The problem is that when you scale this out, you end up with tens of millions of drivers plugging in their car at night — we're back with a similar problem of exponentially larger demand for energy and the same level of supply - unless Obama's signing on to McCain's 45-new-nuclear-plants plan. We've moved the fuel shortage in question from gasoline to electricity.

So yes, the technology exists for a 100 mile per gallon car; but by that standard we’ve had the technology for limitless miles per gallon since the first solar car rolled a few feet. The technology for a 100 mile per gallon car does not exist for practical purposes for the vast majority of U.S. consumers. When Obama says the technology exists to get 100 miles per gallon, he’s being disingenuous by not mentioning the cost and logistical hurdles of bringing this technology to American car buyers beyond a few scattered hobbyists.

Claim 4: We could move to 40 MPG fuel standards for cars. My correspondent points to Japan, and this topic has come up in the past. It’s easier to get a country’s corporate average fuel economy to 40 when the country’s infrastructure is built like Japan’s – small and densely packed. To quote myself:

One can wonder, however, whether the senator was comparing apples and oranges. Japan is small, heavily urban, and has extremely high population density; the vast majority of the population will only need, and want, small, light, highly fuel efficient compact cars. The United States is much bigger, more rural, and people travel much longer distances, both on a day-to-day basis and for, say, the family vacation or driving to Grandma's house for Thanksgiving. For many American consumers, the cars that meet the needs of the Japanese market just aren’t a good option for them, no matter how much we may envy their miles per gallon.

I'll give Obama credit, his statements weren't complete nonsense. But a few phenomenally expensive prototypes here and there aren't a real solution to America's energy problems (or at least not for a long while), and he ought to level with the American people about that.

06/19 04:18 PM Share