Oil Shortages?
It's Happened Before and It Will Happen Again

Posted on September 28, 2006
Posted By: Ronald R. Cooke
 
We love our cars, our pickup trucks, and our SUVs. They present us with the possible: freedom of movement, personal mobility. We are no longer confined by the boundaries of local geography. The open road calls. Owning a car has become a rite of passage to personal independence. We have arrived.

And we built our national culture around this concept of personal mobility. It sets the parameters of our space and time, enables the range of daily activity, and expands the universe of opportunity. Approximately 75 percent of America's 135 million workers commute to work. Alone. One person to a vehicle. Only 12 percent of us bother to car pool. Public transportation, once the primary means of personal mobility, now accounts for under 5 percent of commuter traffic – and this mostly in the highly populated North East corridor. Of the remaining commuters, 3 percent walked to work and just over one percent rode a bicycle or motorcycle or climbed into a cab. The rest of us don't commute at all. We work from home.

Our average travel time to work is 25 minutes. But that statistic doesn't mean much to the 10 million Americans whose daily commute to work takes an hour or more, or the millions of Americans who find themselves fighting frustrating freeway gridlock almost every day.

So here we are. The supreme irony.

We have become the captives of our freedom.

Every workday, over 117 million of us get into our vehicles to begin the commuting ritual all over again. Doomed conformists condemned to bear the stress and aggravation of congested freeways.

But wait. Aren't we overlooking something? See that river of vehicles? Millions of engines burning gasoline and diesel fuels. Clouds of hydrocarbon waste. We consumed - on average - over 555 million gallons each and every day in 2005. More than 4.8 billion barrels of motor fuel in a year.(1) Poof. Gone forever. Can we assume we will always have an unlimited supply of affordable fuels to sustain our existing means of personal mobility?

No. Of course not. Shortages are coming. I cannot tell you when. There are far too many variables. But the ominous signs are everywhere. Fuel shortages. Higher prices.

Our future.

It's Happened in America.

Yes. Here in the United States. Three times in my lifetime. Ration books in 1942. Long lines at the gas station in 1973. Tension in 1979.

WW2

Although very young, I was acutely aware of WW2 gasoline shortages. I was in charge of the ration stamps. Precious little pieces of paper that bestow the freedom of personal transportation. I hid them in a special place. Counted each one with care. Each coupon was good for a little more of the precious fluid. Automobile owners counted the days until the next issue of stamps were scheduled to arrive. The distance of every trip was carefully calculated. They knew to the drop how much gasoline was left in the tank. And then a crucial decision. Is this trip really necessary?

I do not remember why we got gasoline ration stamps. We did not have a car. But it was fortunate for our family we did get them. They could be traded for ration coupons that allowed us to buy other goods we needed in a land of shortages: food, shoes, fuel oil, and so on. It was very sad. And frightening. More than once, someone would knock at our door, pleading for a few pieces of paper.

And of course with rationing came a sleazy black market in stolen and counterfeit stamps, competition among people of influence for the special privilege of extra rations, and “back room” deals for allocations of gasoline. All very ugly.

We were all very glad when WW2 ended.

1973 Oil Crisis

Egypt and Syria jointly attacked Israel on October 6, 1973, on Yom Kippur, the holiest day of the Jewish calendar. Other Arab states contributed troops and financial support. When America came to Israel’s rescue, Saudi Arabia then led the Arab world in an oil embargo imposed on the United States and other western nations.

Oil prices increased by 251 percent. The current rate of inflation soared to 6.2 percent in 1973, 10.97 percent in 1974, and 9.14 percent in 1975. Unemployment reached 8.5 percent in 1975. During this period, American oil consumption dropped by more than 4 percent, and oil consumption efficiency increased by over 20 percent.

Congress took desperate measures. It set a maximum highway speed limit of 55 mph, ordered all new cars to have fuel economy stickers, put daylight savings time into effect for the whole year, invoked a car fuel economy standard of 27.5 mpg, and gave tax credits for the development or use of alternative forms of energy. President Nixon ordered the Department of Defense to stockpile oil reserves, had rationing books printed (never used), called for voluntary carpooling, and formed the Department of Energy.

Many gas stations closed on Sundays, refused to sell to customers they did not know, and restricted fuel sales to 10 gallons per vehicle. They often had no gasoline. Motorists waited in long lines for a few gallons of the precious fluid. We turned down our thermostats, burned more wood and coal, purchased fuel efficient cars (mostly Japanese), and carpooled. The airline industry canceled flights and raised the ticket prices.

The oil embargo triggered a worldwide recession. OPEC was now in a position to manipulate world oil prices.

1978 Oil Crisis

President Jimmy Carter appeared on national television in 1977 to declare America’s dependency on foreign oil to be “the moral equivalent of war”. Few listened. Certainly not Congress.

That left America vulnerable – again – when the Shah of Iran was deposed in 1979. Iranian oil production came to a standstill. Oil production was further reduced when war erupted between Iraq and Iran. Shortages pushed oil prices up 162 percent by 1980, and the price of gasoline doubled by 1981. Inflation exceeded 10 percent per year for three years in a row. By 1983, unemployment had reached 9.6 percent.

Tens of thousands of Americans waited – sometimes vainly – in long lines at the filling station. There were shootings, riots and strikes. Congress reinstated controls on gasoline consumption. Some areas imposed an odd/even plan on gasoline purchases.

It took until 1983 to get inflation under control. Unemployment finally declined to 5.5 percent in 1988.

It Happened in Cuba and Venezuela.

Two nations, Cuba (1991), and Venezuela (2002) have gone through the chaos of oil shortages. In both cases, local meat production and locally grown fruits and vegetables suddenly became very important. Local community neighborhoods learned greater self-sufficiency. They had to change their lifestyle in order to get by with less energy. And they were forced to make these changes in a hurry.

Cuba 1991

Fidel Castro called it Período especial en tiempo de paz - "A Special Period in a Time of Peace". It began in 1991, after the collapse of the Soviet Union. It was a period of economic and cultural crisis. Cuba suddenly found that Russia was no longer able to supply it with the economic subsidies and oil products Cuba needed to survive. Oil imports dropped by approximately 53 percent, crippling Cuba's oil fired electric power system. Refrigeration and air conditioning failed. Chronic power shortages crippled transportation, agriculture, and industrial production. Estimated GDP declined by 33 percent, real wages fell, and unemployment soared. There were food shortages.(2) It has been reported that Cuban adults lost an average of 20 pounds.

The Cuban people adapted to the crisis. From 1991 to 1995, they introduced locally grown sustainable agriculture, overhauled their economy, changed their diet, and adopted new lifestyles. They innovated new modes of mass transit. Authorities enforced car-pooling. Locally grown fresh vegetable production increased 10 fold. Annual population growth declined from .8 to .4 percent. Eventually, GDP growth resumed. Although the Cuban people still have severe economic problems, the "Special Period" got them through their initial crisis.(3)

Although Castro runs Cuba like a socialist dictatorship, he did not use coercion to meet the challenges of Cuba's "Peak Oil" crisis. Instead, he loosened the reins on private enterprise. He told his people that things would be very hard. The Cuban people were forced to find their own solutions. They quickly figured out how to get by with less energy.

In some ways, Cuba serves as a model for an energy detensive economy. Cuba has ordered 8,000 high mileage buses from China as well as 12 locomotives to build a rail system. They are continuing the development of a surface mass transit system with trains to travel the length of the island, replacing energy intensive air travel. In January, 2006 Castro announced a plan to decentralize Cuba’s power system, gradually replacing five decrepit thermoelectric plants with smaller, regional plants supplemented by solar and wind power. He also said Cuba had ordered more than 4,000 diesel and oil generators, with more than 3,000 already delivered. Distributed local power systems are being implemented. Organic farms and urban gardens. A home grown mass transportation system. Decentralization and localization. That’s the plan. Conserve, cutback, curtail, innovate and change. Emphasis on cooperation rather than competition.(4)

Venezuela 2002

In less than 12 months Venezuela went through a political crisis and a devastating economic crisis. The coup d’etat of April 11 was followed by an oil industry lockout and strike that lasted from December 2002 through February 2003. At the time, Venezuela depended on oil for 80% of its export earnings, 50% of its government revenue, and 30% of its GNP. Unfortunately, events drove oil production down from approximately 3.2 million barrels per day in October 2002 to a low of 25 thousand barrels per day in January of 2003. Production did not recover until May 2003.

Unemployment increased from 11 percent in 2001 to over 20 percent in March 2003. Inflation rose from 12.5 percent in 2001 to 30 percent in 2002. The market for personal services was decimated. Customers had neither transportation nor cash. The banking system limited withdrawals. Small businesses were forced to close. Fuel deliveries had to be protected by the National Guard. Consumers waited for hours to fuel their cars and trucks. The availability of air travel evaporated. Caracas became a ghost town. Only a few abandoned cars could be found on previously busy 8 lane freeways. Price regulation was introduced to prevent profiteering. There was a shortage of food in urban areas. Thousands of farmers responded by bringing locally produced meat, fruit and vegetables into the City.

This – in a nation with plenty of oil.

The resumption of oil production brought about economic relief and life began to improve by the fall of 2003.

Conclusion

There are four concepts that thread their way through all five of these oil shortages.

1. There was plenty of oil in the ground. These oil shortages had nothing to do with world oil reserves or potential production. They happened anyway.

2. All five oil shortages were related, or directly caused, by cultural conflict. A world war. Two regional wars. Cold war isolation. Internal political and labor strife. Above ground factors caused a decline in oil production.

3. All five oil shortages had a chaotic impact on the affected national economies. All had higher rates of inflation. With the exception of WW2, all produced higher rates of unemployment. Real GDP growth was erratic.

4. Government could not avert the economic or cultural impact of an oil shortage. People had to fend for themselves. Solve their own problems. Adjust their own lifestyles. We had to solve our personal transportation problems, find new jobs, scramble for food resources, learn to conserve fuels, improve energy efficiency, and so on. Government regulation and welfare could only provide a minimum of support.

On the other hand, we have to be impressed by the resiliency of the human spirit. In every case, we did adjust, we did innovate, we did take the initiative, and we did survive.

So, here we are.

Every week, thousands of trucks ply our freeway system, delivering vital goods and services to our communities. They all run on fuels derived from oil. Every day, thousands upon thousands of containers move over our docks, millions of passengers land at our airports, and multiple thousands of rail freight cars move through our nation. All powered by oil. Every workday roads are paved, roofs are replaced, tires are changed, prescriptions are filled, lawns are fertilized, bugs are sprayed, and garments are purchased. All of these transactions depend on the unlimited availability of low cost oil.

We are a voracious consumer of energy. We have developed an energy intensive economy and lifestyle. Our culture assumes energy will always be inexpensive and readily available. Our values, laws, regulations, social customs, ambitions, and social progress have been inexorably linked the ever-increasing consumption of coal, oil and natural gas. Material abundance and population growth mirror energy consumption. The freedom of personal mobility is ingrained into our psyche. These things, we believe, are a natural right.

They are not.

America is vulnerable to an energy shortage. We almost had another one in 2005. And eventually a chronic downtrend in energy consumption will occur because it is no longer affordable or readily available. We are going to learn to live in an energy detensive world. Our energy intensive lifestyle will give way to a daily routine that consumes less energy.

Detensive. The word of our future.

References

(1) Source: U.S. Energy Information Administration

(2) Portions of the information on Cuba courtesy of Megan Quinn, Outreach Director, for The Community Solution, a program of Community Service Inc., a nonprofit organization in Yellow Springs, Ohio. This article appeared in the special Peak Oil issue of Permaculture Activist, Spring 2006 http://www.permacultureactivist.net/.

(3)For more information about the Cuban experience, do an Internet search on "Cuba GDP 1991 2000" or go to www.state.gov and search for "Cuba: Economic Summary".

(4)In June 2005, President Fidel Castro spoke at the inaugural session of the First PetroCaribe Energy Summit of Caribbean Heads of State and Government. He said that an oil crisis is just around the corner, "it will take place during the current decade". Castro believes the human species faces possible extinction because it is running out of mineral resources. He also said that no Caribbean country will be able to afford to purchase oil if it exceeds $100 a barrel. The solution? Reduce oil consumption by two-thirds.

 
 
Authored By:
Ronald R. Cooke has over 33 years of professional marketing and business development experience. He has an extensive background in market research, industry analysis, and strategic planning. Prior experience includes technology assessment, operations analysis, and the evaluation of corporate financial performance. An economist by training, Ron has pursued the study of Cultural Economics since 1969. tceconomist.blogspot.com
 

Other Posts by: Ronald R. Cooke

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Comments

September, 28 2006

Ferdinand E. Banks says

I've satisfied myself completely that peak oil is the real deal, and peak gas might also be down the road. I also am not taken in at all by the present decline in oil and gas prices, especially the former. But as for adjusting in the short run to a greatly or steadily reduced supply of energy, I don't see that happening, nor should it happen if the movers and shakers stop dreaming and take care of business. The energy in e.g. uranium will suffice to heat most of our homes, and help provide the motor fuel that we need to get to the ski-resorts in the winter. However as some of the persons who have started contributing to this forum point out, whether it will do so for a world in which there are 10 billion or more inhabitants is quite another matter.

We definitely need a new energy economy, but that could mean more rather than fewer BTUs.

September, 28 2006

Len Gould says

In what way are oil shortages in Cuba or Venezuela relevant to the US?

September, 28 2006

Arvid Hallén says

Because they give a hint about what could happen in the US in the event of an oil shortage.

September, 28 2006

Graham Cowan says

The oil shortage that has existed since before I was born continues unabated. I took an empty gasoline can to a gasoline station and not only would they not agree to fill it and then empty their underground tanks into the sewer for nothing, they wouldn't do it even for a Canadian penny.

OK, I didn't actually offer them just a penny, and I didn't ask them to spill any fuel. But if my understanding of economics and this particular market is correct, they would have refused.

Where, as in Venezuela, petroleum-derived fuel is actually subsidized, there is the chance that some of those involved in giving away billions of dollars may see an opportunity to impede the process until the deal changes to their advantage. Has it not, in fact, changed?

Are Venezuelans back to paying only US$0.20 per gallon? If I had a pickup and 60 empty jerrycans of 45 L volume each, could I confidently go to any gasoline station in Caracas and expect to get them all filled? Obviously if the answer to the first question is Yes, the answer to the second must be No. But I could do that here because fuel isn't subsidized here; indeed the merchant would be very glad to see me. Nothing's better than an hour when you feel the jaws of overhead loosening.

Positive fossil fuel subsidies are by far the exception and not the rule. The more usual case of zero or negative subsidy -- negative subsidy typically being the net effect of small subsidies to producers combined with large consumption taxes -- means that Venezuela and Cuba are not good predictors of what can happen elsewhere. Most places, the price can't shoot up with the sudden withdrawal of subsidy because the subsidy is negative, and its withdrawal would reduce prices.

Late in the 1990s the IAEA "Red Book" said 3.3 million tonnes of identified uranium deposits extractable at US$130 or less existed. About seven years later their estimate had been revised to 4.7 million tonnes up to the same price ceiling.

A tonne is thermally equivalent to 100,000 barrels of oil, so in oil-equivalency terms, this works out as a price limit of a dollar thirty a barrel, and the quantities as 330 billion and 470 billion barrels. While this was happening, the actual price was going from roughly 20 US cents per barrel to a dollar a barrel. About 30 billion barrels' worth were fissioned; so discovery, even at sub-dollar prices, occurred five times faster than consumption.

(The price of just finding minable U, not mining it, has been on the order of 0.7 cents a barrel.)

The mentioned fossil oil and gas consumption taxes typically are near $50 per barrel, so if the people who say uranium is going to run out within decades really believed that, they would be confident its price would soon rise until a thermal BOE of it cost as much as an actual BO, rise to US$7,000 a kg, for then there would be the hope of putting $5,000 in tax on that kg, and getting, per barrel, their accustomed fistful of dollars, regardless of whether it was an actual barrel or a uranium BOE.

So Banks is wrong to be uncertain, if he is uncertain, about uranium mining's scalability to ten billion people at hundreds of BOE per person-year. It it weren't readily scalable to that level and beyond, and maintainable there for many centuries, it wouldn't be such a threat to the vested interests.

--- Graham Cowan, former hydrogen fan
Burn boron in pure oxygen for vehicle power

September, 29 2006

Ferdinand E. Banks says

Graham, nobody ever heard me say at any time that there was a shortage of uranium, and I certainly accept the calculations in your comment. In fact a week or so ago I examined some similar work by John Maddox - the former editor of Nature . I didn't pay any serious attention to it however because I consider it irrelevant. You remember the famous offering of Lord Keynes, 'in the long run we are pushing up daisies', well by that he meant that in the long run we can turn that uranium into all the motor fuel that 10 billion Cadillac owners will ever need, but that wont put bread on the table next week, or maybe not even in the next century, when the 10 billion might have become 12 billion.

September, 29 2006

Dick Maclay says

When and if fossil fuels become short their price will rise to the point that we use less of them. BUT that does not mean trading in individual transit for mass transit. I will buy a plug in hybrid LONG before I give up the freedoms afforded by individual transit. Most Americans will act similarly. And in China today the fastest growing question is, "honey, when are we going to get our own car?" There is no need to own a car in China today. Taxis are ubiquitas. But a lot of new 5 story condos are being situated so that public transit and taxis are less convenient than they are to existing buildings. China is building high rise suburbias because there is not enough land to for low rise suburbias. But a lot of new condos come with a garage because people want one.

We should expect to see more substitution of energy sources than deenrgizing of our economy. And in delveloping parts of the world energy intensity will rise. Unless someone comes up with a better, more economic, idea it appears we will largely replace oil with nuclear power.

September, 30 2006

Murray Duffin says

Mr. Cooke - excellent article!! Congratulations. Mr. Maclay - the largest and cheapest sources of marginal energy available today are efficiency and conservation, even in China. They are also the quickest to implement, and the most economically desirable. We will need all sources of new energy before long, renewables in all forms as well as Nuclear, but efficiency and conservation are the biggies for quick response to shortages. Regretably, none of the responses will happen to the needed degree without a crisis and corresponding economic disruption. Mr. cooke has provided clear illustrations of what to expect. Murray

October, 02 2006

Don Hirschberg says

Cooke's list of "Oil Shortages" is a list of red herrings. There is, and has been only one oil shortage. It's called depletion, resulting in Peak Oil. It will only happen once - there is no list. Depletion started with the first barrel of oil we used.

We have no shortages, we have too many people. Just today I read about the US population to reach 300 million this month. Three hundred million is a significant number - it happens to be the largest population the world ever has had up until a 1000 years ago, a mere tick of the geological clock. All those civilizations up until modern times rose and fell in a world of 300 million or less. Persia, the dynasties of China and India. Egypt and Greece and the Romans - all in a world with only a relative sprinkling of humans.

Not until we used fossil fuels did world population increase exponentially. What other source of energy have we since invented or dicovered: exactly one. Nuclear.

Without a drastic reduction in world population and fusion I don't see survival of our civilization. Alas, both are long shots. Regards, Don Hirschberg

October, 03 2006

Ferdinand E. Banks says

Don Hirshberg, you'll have to explain to this humble teacher of economics how fusion will offset or solve the population problem, because frankly this is too subtle for me. I can see it making things worse however due to added pressure on finite resources, and from there the operation of Reverend Malthus' famous hypothesis.

As for the 300 million you mentioned, that's only a drop in the bucket. The good Professor Colin Clark (of Cambridge and the University of Queensland) once assured his audience that the carrying capacity of the earth is about 40 billion. He never said however whether he wanted them living in his neighborhood. And dont forget that a favorite of some contributors to this forum, the late professor Julian Simon, believed that the more the merrier, because to his way of thinking greater numbers meant greater brainpower. Of course, in thinking of Colin Clark's less controversial work, I can suggest that Prof Simon might have been correct if he had specified 'gross' for this marvelous increase in problem solving ability, because anybody with any intelligence at all should be able to see that 'net' the picture can be quite different.

October, 03 2006

Paul Stevens says

Clearly world population will continue to increase for some time. But as has already happened in Canada, the US, Europe, and the wealthier parts of Asia, birth rates will level out to replacement levels, or even slightly less, probably in 30 - 40 years.

Can the earth carry this kind of load? Energy requirements do not have to be at US energy consumption per capita levels. European or Japanese levels may be more likely. Given the raft of technological improvements in lighting, transport, etc. already moving through the pipe, total world energy consuption is calculable.

Developing countries have an advantage in terms of implimenting 3rd generation energy technologies, and avoiding many of the costs and negative effects of 2nd generation technologies.

World pop. will never reach 40 billion, even if it could. Total impact of an affluent (comparitively) energy using world population of 12 billion by 2050 will likely be less than todays 7 billion.

October, 03 2006

Warren Reynolds says

Ron: Great article ! Your past examples are an indication of what is to come when we begin to run out of oil. I feel it will be more drastic than what you have described. I hinted at this in my recent article (EnergyPulse) that we would experience a heavy recession if not a depression lasting until the solar-hydrogen economy was in operation.

Graham: Financial analysts (at GE) have shown that taking into consideration the cost of mining uranium, processing the ore, conversion to UF6, isotope separation process, conversion back into UO2, cladding UO2 into zirconium rods and placing in the nuclear reactor yields less than 3% profit at today's electric rates even with Government subsidies. That does not include the cost of nuclear waste disposal.

Don: I beg to differ with you about Nuclear being the only source of energy we have invented or discovered. The second one is Solar-electric, e.g. solar Stirling engine.

You are correct, nuclear fusion is a long shot even by 2060 if at all. Then, there is the problem of only a 90 years supply of the required lithium-tritium fuel.

October, 03 2006

Ferdinand E. Banks says

You learn something every day in this world, I'm afraid.

For instance, a heavy recession or even a "depression" until a solar-hydrogen economy was in operation. That sounds to me like a run-up to the Third World War. Similarly, I would like to suggest that those "financial analysts" at GE who have come to the conclusion that a 3% profit rate is the best that can be obtained with new nuclear equipment need to be directed into another line of work.

It also appears that somebody thinks that I believe that world population can reach 40 billion. What I said was that Professor Colin Clark gave that as his estimate, and in fact was able to say it on a number of occasions without those people in the white coats paying him a visit. Instead they named a building after him on the campus of the University of Queensland. And finally, the belief that the total impact of 12 billion in 2050 will be less than the impact of 7 billion today is of course a joke, isn't it Paul, although I'm afraid that it's a very poor one and doesn't bear repeating.

October, 03 2006

Don Hirschberg says

Prof Banks, perhaps I didn't sy it well, but my meaning is that it will take BOTH population reduction and a new energy source, fusion. And when I say population reduction I mean purposeful reduction, not reduction by the collapse of world enconomy and all that might accompany it -starvation, epidemics, riots-come wars.

While it seems eminently logical that more brains mean more brain power, I think other conditions swamp this effect. Take some examples: Athens with a population in the 10's of thousands produced brains we still respect. Our tiny pre-revolution population produced many first class brains, as did small populations in England, Italy, Holland, to name a few. Today the tiny population of Israel seems to produce more effective brain roduct than the entire Muslim world.

Paul Stevens, today some 10 to 20 thousand children will needlessly die from diarrhea - in the next 24 hours! Today there are vastly more people livinng in abject poverty than in pre fossil fuel days. Surely you are not suggesting more.

Warren Reynolds, I didn't consider solar power an "invention or discovery of man." In a sense every dog has discovered it. Solar-electric is certainly a great invention and I have no objection if your list has two items instead of one.

As far as Iknow we don't know what process might eventually be successful in making fusion power, so I am not qualified to comment on the supply of lithium-tritium fuel.

Forgive me my spelling, I usually make much -needed use of a checker. Thanks for all the comments and the education. Regards, Don Hirschberg

October, 03 2006

bill payne says

some of us have known about peak oil since 1956.

regards http://www.prosefights.org/shattuck/shattuck.htm

October, 04 2006

Ferdinand E. Banks says

Don, I don't think that we disagree about this population thing, because when you say that "other conditions swamp this effect" you are distinguishing between gross and net, as I attempted to do in my comment.

October, 04 2006

James Hopf says

The statement about only 3% profit is way off base. The cost of nuclear fuel assemblies, which includes all of the items listed by Mr. Reynolds, amounts to only ~0.5 cents/kW-hr. More significiant are the fixed operating costs of the reactor (maintenence, staff payroll, etc..). After these are added to the fuel cost, the average total operation cost of nuclear plants is ~1.67 cents/kW-hr, and the cost is trending downward. This is ~1/3 the market cost of electricicty nowadays. I believe that equates to 200% profit, not 3%.

Operating plants are enormous cash cows for the utilities that own them. Although much of the cash flow goes to amortizing plant capital costs, heavily nuclear utilities have much higher than average profits.

The 1.67 cent figure above does indeed include all waste disposal costs, as well as all plant decommissioning costs. Nuclear is the only major energy source that fully pays its way like this. Operating plants receive no govt. subsidies. On the contrary, they pay enormous taxes. Also, the federal govt. is basically stealing the nuclear waste fund payments and using them for general expenditures. Thus, there is basically a tax (as opposed to a subidy) on nuclear waste/power.

October, 04 2006

Todd McKissick says

James, can you clarify for me why my electric bills went up so much this year? I'm in a strictly coal and nuclear region in the middle of the country. If it was the case that nuclear plants operate on a 200% margin, then my state run utilities should not have needed to raise rates lately. What is the driving force that will be needed to see it ever reduce from present levels? Taking a short survey of friends, etc. I'm hearing that the average energy costs (total home and auto, and taxes) are over 20% of net blue collar income. I don't think it was that way in the 1950's but I don't see the percentage reducing in my kids' lifetime.

My guess is that they charge what they can. I'm not sure I believe a 200% margin because of PUC regs, etc. but you're right about one thing. It's sure not cash poor like other industries that run on margins of 6-15%.

October, 04 2006

James Hopf says

Todd:

The short answer is that the recent increases are due to the large increase in natural gas prices. These plants are the last-increment supplier, and generally set market rates even if they are a small fraction of generation. Even if there were no gas plants in your local area, they could still increase your prices (under a market system) because your utility would choose to ship the power off (to gas-dominated zones) where they can get a much better price. We have enough transmission capacity to make the commodity somewhat fungible, and gas is setting the overall market price.

It can get complicated, and it depends on the degree to which your local system is a "free market" system or an old rate base, PUC system. One thing is certain though; nuclear plants are not responsible for any large, recent increase in price, as nothing has happened at those plants to change their situation. Their costs have not gone up. In fact, they're known to have come down. For the nuclear-generated kW-hrs, all of the price increase is going to increased profit. It has to be related, directly or indirectly, to the gas cost increase. Note that coal has gone up measurably as well. Also note that I was only talking about operating costs, as that was what Mr. Reynolds was talking about (suggesting that fuel costs alone were just under market price). Whereas nuclear plants are earning over 3 cents/kW-hr, most of that money is going to pay off the capital cost of the plants.

It is true that utilities negotiated a good deal when the transition was made to a market system, concerning nuclear plant capital costs. They got a lot of it put into the rate base. Perhaps with power costs going up everywhere else (due to gas prices), it was easier for your utility to argue that they needed a large increase. It may be true that your local PUC is giving them too much, to the extent that your system is the old rate base model. Under a pure free market system, however, gas will set the price, nuclear plants will make enormous profit, and nobody can say a thing about it.

These high profits are necessary, however, to make the upfront costs, and risks, of building capital-intensive baseload or renewable plants worth it to the utilities. If not for the promise of high profits, they will all take the easy (short term) way out and build nothing but gas, or perhaps conventional, dirty (non-IGCC) coal. This is the last thing we need, so I'm actually not all that offended by the prospect of high profits.

Concerning the cost of power (vs. income), I would suggest some simple conservation steps, in lieu of more radical steps like home generation. I have a 3 bedroom, ~1500 sq-ft house (in CA, admittedly), and my average monthly power bill is ~$30-$40.

October, 05 2006

Todd McKissick says

James, I understand your justifications and do believe in their validity. However, they actually serve to help prove my point. Inherant in the centralized system is the inevitable price that a given customer must pay. This is a factor of so many reasons, most of which you cited, that there is no way for it to ever change.

The point I've made repeatedly without response is that most DG systems are a one-time capital only expense. You go get a loan or add it to the home loan, and bring it home from the store. Beyond these payments, you don't have to feed it monthly. Once it's paid off, you don't have any cost, not even taxes. (obviously this depends on the scope of the DG in question). The monthly payments don't change so they are not only not affected by inflation, they are stable while inflation rises around them.

The other interesting point is that DG deals with a purchase market. This means that product competition increases sales by either lowering price or adding features. This competition helps the energy crisis which is opposite of the central utilities competition to sell more energy. It also means that the associated risk involved is low enough and distributed enough that it doesn't stand out in the purchasing decision. It is also easier for Joe Salesman to hide 10% profit in residential price than for a large plant.

I'm not sure I believe that your power bill includes all the services I mentioned. For the record, my equal sized home costs (including the taxes) average $100 electric, $60-$215 NG, and $300 in gasoline go to the car. In the midwest, you either live expensive and drive cheap or the other way around.

Wouldn't it just make so much more sense to spend those energy dollars on a purchase that could produce all your energy requirements and possibly more? Someday it'll be paid off and then how will the costs compare?

I'm not against using any nuclear. The grid will need a certain amount of baseload. I'm fighting back to those who readily dismiss DG as a non-player. We are told of nuclear technology that promises great things in the future and our government chooses for us to spend those research dollars. Will it work? Maybe, maybe not. But when DG makes those promises, they are frequently dismissed. There are solutions coming very soon that beat out all other players in every category you can pick. My guess is that their price won't have much to do with the price of some energy commodity in some other market.

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