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Friday, January 2, 2015
Economics/Business ... Politics ...

There’s an interesting little debate going on in the “energy sector” these days about something called Enhanced Oil Recovery. It’s one of those boring things that could some day make a big difference in how our world works, but for now it’s mostly under the radar, save for a handful of researchers, energy industry planners, and environmentalists (including green energy developers who could be affected by it). The people who favor EOR (as they call it) are mostly Republicans; but with just a bit of political imagination, the Democrats could make a lot of good use of this idea. If only they had the wits to do so.

In its most boring, generic format, Enhanced Oil Recovery is the use of pressurized carbon dioxide gas to push petroleum out of oil wells that otherwise are considered “depleted”. Most depleted wells still have plenty of oil down in them, but getting to that oil and pumping it out costs more than the stuff is worth. If you could obtain reasonably priced carbon dioxide, you could pump this otherwise abandoned oil out cheaply enough to sell it and make some profit (well, perhaps not in today’s $50 a barrel oil market, but the current oil glut and price crash may be a temporary market over-shoot that will resolve itself, with oil eventually settling around $75 per barrel, about half-way between the current lows and the previous plateau of around $100 per barrel).

That’s the plain-vanilla version; there is now a maximum-strength EOR proposal, however, that environmentalists and green energy advocates will probably say comes right from the devil himself. In a recent article on the conservative Weekly Standard web site, energy analyst and EOR advocate Samuel Thernstrom calls for the federal government to jump-start the EOR industry by giving oil drilling companies a $40 tax credit for each ton they buy of compressed carbon dioxide. Yes, there they go again, those darn conservatives and their irresponsible tax cuts.

But Thernstrom says that this tax credit would actually increase federal and state revenues, given that it would increase domestic oil output, thus increasing the collection of taxes on oil production. Well, maybe; I myself can’t argue with his math. The more interesting aspect of this proposal involves where the carbon dioxide would come from. As part of his EOR package, Thernstrom calls for increased federal subsidies of research in carbon dioxide capture technology development for coal-fired power plants.

Right now (or soon, given technology now being tested), a coal plant can probably capture and deliver a ton of CO2 gas at about $80. But given current oil price levels and stranded oil recovery costs, a ton of CO2 is only worth up to around $40 to them. Beyond that, it’s not worth the overall cost of getting the stranded oil. So, the $40 per ton tax reduction starts making it worthwhile for oil producers to buy CO2 from coal-burning power utility companies. And federal research support could help to get the CO2 production cost down further, such that the federal tax credit level could eventually be lowered (or so I would hope! But you know that the oil industry lobbyists would try to keep the full tax credit and increase their profits instead).

Hmmmm . . . so what would we have here, assuming that this whole scheme worked? Well, according to Thernstrom, if oil were at $90 per barrel, 85.4 billion barrels of oil would become economically recoverable. Given current US and world oil production realities, I’d say that $70-75 is more realistic. So maybe it’s more like 45 billion recoverable barrels. If we say that is recoverable over 15 years, then we are talking about 3 billion barrels of extra oil production per year. Currently, the US is producing about 3.2 billion barrels per year, and the world overall produces 33 billion barrels. As such, US production doubles, and world production goes up around 10%. That probably would not hold, as the increased supply would bring oil prices down further, which reduces the amount that is economically recoverable. Still, it seems roughly reasonable to me that this new supply of oil will increase overall world oil consumption by maybe 1.5 to 2 billion barrels per year, through price effects.

Obviously, that means more CO2 going into the air, making the greenhouse gas situation worse. But then again, we have those tons of CO2 from the power plants going into the oil wells; with a bit of care, that CO2 is captured underground (“sequestered”), and thus serves to reduce CO2 emissions (given that you were going to burn the coal anyway to get electricity). If federal research can bring the price of CO2 capture down from $80 per ton, then even more CO2 will be captured, and perhaps not just from coal power plants. At some cost point, it might become economic to start capturing CO2 from natural gas power plants too (natural gas has about half the carbon as coal, so it’s inherently tougher to recover carbon from a gas-turbine exhaust stack versus a coal plant stack, as there’s less of it).

So, there are arguments going on between experts as to whether EOR overall reduces or increases CO2 emissions. If the new oil only substituted for existing oil, then the balance would most likely be favorable; but if I remember my Markets 101 (aka “microeconomics”), any new supply source whose costs are below the current price level will bring that price level down somewhat, and simultaneously increase the consumption level. I’d roughly guess that the full-strength government supported EOR program that Thernstrom proposes would somewhat increase carbon emmissions into the atmosphere.

But before we banish this idea on grounds of global warming, let’s ponder first what we would be giving up. First off, US oil production could increase significantly, maybe almost double. Wow, possibly we could then get all the imported oil we need from Canada and Mexico, and no longer be held captive to the Saudis or other nasty countries who now satisfy our thirst for the black gold of the modern service economy. Second, the economic growth rate would pick up even more; sure, this would largely line the pocket of the rich, but the trickle-down effects to the working class cannot be ignored either. I’m talking about JOBS, JOBS, JOBS.

I know that the green energy advocates say that it’s time to just forget about playing around with carbon and get down to converting to a carbonless economy. But sorry, to suddenly dump carbon fuels and put all of our wealth into developing wind, solar and other alternative fuels would really hurt our economies for a decade or two. Germany is trying something like this, and is going through a nasty unemployment and low-growth hangover right now. The USA has too many Baby-Boomers like myself who are expecting our Social Security checks and Medicare payments. If we throttle our economy back for the next 25 years to fully transition to a green energy world by say 2050, the Boomers are going to get stiffed. And yea, there are good arguments that maybe we deserve it, maybe we should be willing to endure hardships and possibly shortened lives so that the next generations can have a sustainable world. But politically, I just don’t think it’s gonna happen, short of a revolution that would dump the current US Constitution.

As such, I’d say that EOR is going to be part of the mix; and there are two potentially interesting political twists on it, twists that ironically could help the Democrats (if they could somehow figure it out). First off – I think that a bold federal EOR initiative could get President Obama and the Democrats off the hook regarding the Keystone oil pipeline project. The idea would be to trade-in Keystone for EOR. Keystone is clearly a dirty source of oil, and it benefits the Canadian economy more than it does ours. EOR would be almost entirely an American project, and it is possibly a bit less dirty, environmentally. As CO2 recovery technologies get cheaper, it would get less and less dirty over time, perhaps becoming carbon-neutral. And eventually, maybe it even leads to carbon reduction. Sure, the green-wing of the Democrats would be very upset, but an all-in EOR tax credit and research program surely would get the GOP off their backs in regards to Keystone.

The second possible twist – Thernstrom argues that a federal tax credit program would be much better than Obama’s proposed EPA carbon reduction regulations. But hey – what if the Democrats came up with their own version of an EOR program, but instead of tax credits for purchase of CO2 by oil companies, they instead applied a carbon tax of say $50 per ton on CO2 emissions from coal plants? (That’s right; don’t stop with wimpy EPA regulations, go for the full-monte carbon tax!) And at the same time, provide stepped-up funding for research to get carbon capture technology to the utilities ASAP and as cheaply as possible. If the initial capture cost were $80 per ton, as Thernstrom estimates, then the utilities should over time stop paying the tax, and instead install the recapture equipment and sell the recovered CO2 at just over $30 a ton – within Thernstrom’s estimate of its market worth to oil producers interested in EOR (if the utilities get the full $40, they’d be ahead; and if the capture cost comes down with volume and technology advances, so much the better still).

Yes, using an emissions tax versus a CO2 buyer’s tax credit would push some of the cost onto electricity consumers, i.e. higher electric bills. But then again, Obama’s proposed EPA CO2 control regulations would have the same effect. The good thing about putting the onus on utilities is that it primarily encourages carbon capture technology development, with enhanced oil output being a secondary effect. Giving the oil producer a tax credit primarily encourages oil production, with carbon capture development being more of a by-product. Better carbon capture will have greenhouse gas reduction benefits in the long run, and so the utility tax approach is just a bit more “green”.

In effect, EOR tied with coal exhaust recovery technology would act as a “Trojan Horse” to help the Dems get a limited carbon emissions tax passed, at least against concentrated industrial sources (coal power plants, of course, but also concrete plants and possibly other sources; again, as the recovery technology gets better, other less concentrated CO2 sources such as natural gas turbine plants could economically recover and profitably sell CO2). You know that the GOP Congress would not go for this, but it certainly could embarrass them. It would just make so much sense, that perhaps it would help make the Democrats regain their mojo in the 2016 House and Senate elections.

So . . . we have here a proposal from a conservative author that could, with just a little bit of imagination, be twisted and co-opted to the Democrats advantage. But that’s just if they could just take Chuck Schumer’s advice and get back to focusing on the economic well-being of the common family, and stop being driven entirely by the elitist lobbies including the green energy people and radical environmentalists. I’m not going to hold my breath on that; without my own CO2 capture technology, I’d die of asphyxiation waiting for the Dems to adopt something that might actually make sense to the working class swing voters.

◊   posted by Jim G @ 9:39 am      

  1. Jim, You did a masterful job explaining about E.O.R. It would be wonderful if the “ordinary” Congressman/woman would likely read it thoroughly. My hunch is that he/she would say, reduce this to a paragraph of no more than 5 short sentences, and I’ll see what I think. Likely, that’s why we have such an inefficient Congress – at least that’s my tho’t regarding our government; it’s a shame to say.

    Then I tho’t about the “ordinary” lay person: How likely is he/she to read about this a worry about it. In this case my hunch would be another person very like yourself who loves science and math.

    Not being either a science or a math person, I *did* read the entirety of your post. And while you give some potent reasons why the Democrats should put their time and efforts into seeing about this Enhanced Oil Recovery, I sincerely doubt any of them will. As I say, they want it short and sweet and then they will think about it, I’m sure.

    Then there are some other problems I have with this issue: Most lay individuals are consumed by the efforts their own lives take to live as comfortably and reasonably as they can. Think of the single mother with 2 jobs and a couple of kids, even a father with his wife who works and a couple of kids. Then there are other individuals whose lives and energies are put into their illnesses, efforts to stay alive, and various life problems that consume all their energies. I doubt they can spend a lot of time worrying about E.O.R.

    Yet another problem I have about the entire “warming climate” and the whole environmental concerns is that I find I just can’t get myself too worked up about it all for the simple reason that I keep wondering (and no scientist seems ever to address this aspect of this issue): How much of the climate change is due to the regular pattern of the earth and nature. After all, 10,000 years ago (and who knows how long before that) there was a “cool climate”, then a warmer one, etc. The Earth itself seems to have some kind of climate pattern that scientists don’t seem too interested in studying. Maybe if they did, they’d find what that pattern might be and be able to aid the world as it is now in adjusting to a natural phenomenon.

    I’m sure that the response to my query is that humans with all the harmful emissions they are producing in many ways are only bringing a climate change on faster. Yet, climate change will come, like it or not, is what seems to have been the case many times in the past; we aren’t going to substantially change any such pattern the earth itself may have.

    Finally, in the end my hunch is that, even tho it’s a shame to say, the lobbyists with the most money will have the most influence on Congress, Democrats or Republicans; that’s who is going to “win” in any struggle For E.O.R. or Not For E.O.R. MCS

    Comment by Mary S. — January 2, 2015 @ 3:01 pm

  2. So let me make sure I understand this. You acknowledge that “getting the stuff out is more expensive than it is worth, but you want to subsidize the oil & gas industry to make it worthwhile? As you know, most economists would argue that you should only subsidize something if it provides positive externalities. But oil & Gas exploration provides negative externalities- which means it should be taxed at a higher rate.

    Moving away from a carbon-based economy will of course take some time. But the earth’s literal long term survival depends on it – at least that is what scientists say. And doing anything that lowers the price of oil& gas makes alternative energy sources and research less viable. Just because we only have a few decades left, doesn’t mean we should do something that we know is the wrong thing for Generation Y – especially since you want Generation Y to take care of your social security needs.

    [Steve — good points, as always. But you are focusing here on the economics of the situation, as though politics do not exist. The main point of my article is that given the current and anticipated state of American politics, a coal carbon tax that would make CO2 prices drop to the point where it becomes valuable for enhanced oil recovery is a compromise that would do the least harm relative to the drill-baby-drill philosophy that an increasingly powerful GOP promotes, long-term economic externalities be damned! It would offer a politically attractive alternative to what the dirty old GOP is selling (and having much recent successes in the voting booth with). I believe it also has the potential to do some good in the long run, to exploit some positive externalities, as I explained. As they say in politics, don’t let the perfect get in the way of the good.]

    Comment by Zreebs — January 4, 2015 @ 9:00 pm

  3. This oil that is still left in the wells is not going to go away. So while it might not be worth extraction at today’s prices, it might be worth extraction if oil prices double. Why not wait until it can be extracted without a subsidy?

    Comment by Zreebs — January 4, 2015 @ 9:09 pm

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