Thursday, September 20, 2012

Energy Security: Vital to a Nation's Independence

This is the Third Part of the Series on Energy Security.

Part III

What is the Cost of Energy Security?

Most of us realize the cost of energy.  We see it when we put gas in our vehicle, or pay our power bill.  The cost to us, and its effect on our economy does not stop there.  Everything you come in contact with has an energy cost. To understand these costs we will focus on Oil as an energy source.

At the time of this blog being written the cost of a 42 gallon barrel of oil was $98. From a average barrel of oil you will, through the fractioning process, get about 19 gallons of gasoline. Do the math..Cost per gallon=$98 per barrel/42 gallons in a barrel.  Cost per gallon $2.33.  Keep in mind this is pre-production cost...nothing has been refined yet.  Refining adds another $.50 per gallon...which brings us up to $2.83 per gallon.  Of course there is a tax with that.

Federal Taxes are a flat 18.4 cents per gallon.  State, and local taxes are highly variable based on where you are.  In Florida the total in taxes is 38.4 cents per gallon.  That now makes the price of one gallon of gas $2.90 per gallon.  Of course the company that refines the gasoline must transport it to the pump, advertise it, pay employees etc...this adds another 29 cents per gallon. Leaving us with a flat cost of $3.19 per gallon.  At present, (20 September, 2012) the cost of gas at my local station was $3.70 per gallon.  That would mean the gas companies are making 50 cents on every gallon...right?

Not so right...that 50 cents does not account for other taxes (income, property, etc).  This is where things get  difficult to track on a per gallon basis.  The other factors that affect cost at the pump are so highly variable that it becomes nearly impossible to accurately that this point I must make an educated guess.

In 2007 Exxon's stated after tax earnings were 10.4 percent. That is higher than the industries average earnings for that year of 8.3%.  Those numbers are after-tax income.  To make maters worse those earnings include the sales of non-gasoline items.  Yes..those $2 Twinkies add to the company's profits.

In the retail world (and you are buying gas at retail prices) the cost of an item already includes all of the associated expenses.  This includes the actual cost of an item, advertising, employees, sales space, and other operating taxes.  Then they bump that to "what the market can bear" or what is commonly known as the markup.  Jeans for instance carry a markup of 100% to 350%.  Now lets say that your local gas station shoot for Exxon's 10.4% profit.  It would appear that the sale of Jeans is much more of a greed issue, than the sale of gasoline.

But what about the base cost of $98 per barrel of oil?  Where does that come from?  We have all heard of the theory of supply and demand.  The greater the supply and the less the demand the less money something is worth...and the inverse is true as well. There is another factor at play...Market Sentiment. There is a mistaken belief that investors in oil control the price as part of a grand conspiracy.  There is some truth to that...but that is something to be discussed a bit later.

The way most people invest in oil is by investing in the oil company.  This has no impact on the cost of oil one way or the other.  The oil companies profit as we described is not just from oil, but from all of the other products they sell as well.  However, there is a special group of investors, and they do affect the price of oil. They are called Futures Investors.

Futures investments mean that a purchaser agrees to pay a particular price for a product on a specific date.  This is an extremely important method of investing since it allows a company to plan for a rise, or drop in prices of a particular product. Futures investors come in two flavors...the Hedger..and the Speculator.

An example of a Hedger would be an airline.  They buy oil based on a set price.  This protects them from unexpected hikes in price that would affect the cost of their business. A Hedger intends on actually buying the oil.

A speculator is a totally different animal.  They use guesses (educated sometimes) to determine what the price of oil will be at a future date.  They have no intention of buying the actual product. This type of investing can be a roller coaster to doom, or a ride to great wealth.  And the determining factor in both is Market Sentiment.

The mere belief that oil prices will rise..or fall is enough to result in the immediate increase, or drop in prices. This is like letting your cat play the piano...he might hit some comforting notes...but he is just as likely to drive you nuts.

Although Futures Investors play a significant part in the price of oil world wide, there is of course OPEC. The Organization of Petroleum Exporting Countries is the largest organization that controls the price of oil. The list of member countries in OPEC reads like a Who's Who of unstable dictatorships, and theological opposites of the western world.  But there is a symbiotic relationship.  OPEC needs the money from the industrialized nations of the west to survive, and the west needs the OPEC to continue forward.  Or so they want you to believe.  As much as I would love to jump into that discussion right will be saved for the next installment of this series.

Part III

You have learned the reason gasoline costs what it does.  The fact that nothing in this nation moves without it has been a fact since the invention of the internal combustion engine.  In the days before the train goods were moved by horses.  A horse could move twice its weight 30 miles per day.  So if you wanted a nice orange from Tampa, it would take 25 days to have it transported to North Carolina.  In that would not be so nice. Prior to the invention of the train your food had to be locally grown. A train can move that orange in less than 12 hours.  Add refrigeration and you can get fresh orange juice year round.

Look around your home...everything there is tied to the price of oil.  For manufacturers of goods, energy is a prime consideration in what you pay for those goods.  I have watched those shows were people get "back to nature".  They brag about their independence from the normal world...while they cut wood with an iron axe.  That iron was mined using modern methods of digging.  It was smelted in large furnaces fired by coke (a coal derivative).  It was transported to the store by truck or train using petroleum products.  The people who mined the ore, smelted it, and eventually sold it..all used Oil to survive their day.  Try as you might...oil is a requirement.

The Cost imposed by Government equates to 56.4 cents on every gallon of gas sold in Florida (86.9 cents in California) compare that to the before tax profit of the Oil company of 50 cents and it is clear that the entity that profits the most is the Government. 

Most of the argument about Oil comes from those who dislike big oil companies (I call that jealousy) and the environmentalists (I normally write that environMentalists). As far as big oil goes...they profit no where as much as the Government..and they take all the risk.  In the pricing scheme the post Oil per barrel cost is peanuts compared to what the raw product costs.

The next installment in this series will deal with the issue of how we can become independent of outside influences in creating Energy Security.

Read Part I and Part II 


Monday, September 17, 2012

Energy Security: Vital to a Nation's Independence

This is the second part of the Energy Security Series.
To read Part I Click Here

Part II

Measuring Energy Resources

When measuring Energy Resources there are some fundamental ideas you should know.  For many energy resources such as, Coal, Oil, and Gas there is a big difference between how much exists, and how much can be recovered economically, or within the confines of current regulations.

The economics of recovery is affected by not just the difficulty in recovering the resource, but also recovering it within the confines of current regulations. The basis of how much in recoverable resources is based on these two issues.

According to President Obama's administration the United States has 20 million barrels of "proven" oil reserves.(1)  When the President refers to "proven" reserves he is talking about resources that can be recovered given economic, technological, and regulatory constraints.(1) What does this mean?

When they say economic constraints this basically means the oil can be sold at a competitive price. Probably the most self-regulating portion of any business is the ability to sell the product at a profit.  For U.S. producers this means waiting for the price to be increased by OPEC before they can sell what they have.

Technological constraints are a bit different.  15 years ago much of the oil located in North Dakota were not technologically accessible.  However, in the 15 years since then drilling methods have made the oil not only technologically accessible, but economically accessible. Technology has opened all new sources of Oil alone and continues to do so.

Regulatory constraints is a government created obstacle.  It takes approximately 10 days to get a permit to drill for oil in North takes a couple of 14 days to get a permit to mine coal in take 27 days to get a permit in takes almost 307 days to get permits from the Federal Government..and in the case of may take even longer.  Some will probably argue that the Federal Government is more concerned with the environmental impact.  Nothing could be further from the truth.  The States are very keenly aware of the impact that drilling or mining may have on their natural resources, and people's lives. Why does it take the Federal Government so long to approve a new well or mine, when the States can do so in at most a few weeks?  Maybe we can answer that question by the end of this series.

What about he President's opposition? The Republican party uses a USGS study that says there are 198 billion barrels of oil that is "Technically Recoverable".(1) Technically Recoverable includes not just oil we know is there, but also oil we think is there based on geological surveys and can be recovered by present technology.  The estimate does not take into account the economic feasibility, or regulatory constraints.

As you can see by the chart there are 763 barrels of undiscovered oil..and the United States has 26 percent of that oil. Is this an accurate picture of the oil resources for the United States.  No, it is not.

The USGS only takes into account traditional oil. You know the kind that squirts out of the top of an oil well.  However, it does not take into account the oil found in the tar sands of Canada, or the shale oil in North Dakota and Montana.

Using these numbers it is easy to see that President Obama is underestimating the amount of oil resources available. Though it may look like the Republicans are over estimating the amount available it may very well be likely they are underestimating that amount as well.

A much more detailed study that included all forms of Oil concludes that there is approximately 1442 Billion Barrels of oil in the United States alone. According to Energy for America if we include the 320 barrels of oil in Canada, and the 31.2 billion barrels of oil in Mexico we have a total of 1.7 trillion barrels of oil.  That is more oil than the world has drilled since the discovery of oil in Titusville Pennsylvania 150 years ago, or enough oil to power the United States for 250 years.(2)

Invariably someone will ask, "What about Alternative/Renewable Energy Sources?" What about it?  We certainly will not stop researching and testing alternative sources of energy, but on the other hand why would we cripple our economy now on untested alternatives?  If we can't find a viable alternative energy source in the next 250 years...maybe we should all find a cave now?

In the next installment of this series we will look at the Economic impact of Energy.

References Used.

Sunday, September 9, 2012

Energy Security: Vital to a Nation's Independence.

Part 1
The Importance of Energy Security

For a nation to be able to exist it must be free to make its own decisions independent from influence from other nations.  There are three key elements that empower that type of freedom.  They are Economic Security, Energy Security, and National Security.  These three elements are connected to one another and a weakness in one, will cause a weakness in the entire system.

Security Pyramid 

Many will tell you that Economic Security is a very complex system that requires years of advanced study.  In reality, you are an expert (if you are not in debt up to your eyeballs).  If a nation owes other nations then it is not free to pick its own course.  Economic Security is closely tied to National Security.

National Security is defined by the Instruments of Power that a country can use to remain free.  These Instruments of Power are defined by the D.I.M.E theory.  The D.I.M.E theory can be quite complex but I will attempt to make it easy to understand.

Diplomacy is a very important part of National Security.  Diplomats negotiate with other nations on nearly everything.  Social issues, Import/Export treaties, Peace treaties, Military access, and mutual support agreements...and many more.  A nations leader may say one thing to the public, but his diplomats convey the real message to other nations, or in some cases try to head off something a politician said that was stupid.

Information about ourselves and other nations is key in National Security.  This information comes from many sources, with a huge portion being gathered, analyzed, and distributed by a nation's intelligence agencies.  The release of this information is sometimes carefully scripted to lead a nation's enemies in to believing one thing, when in fact something else is true.

Military power is the sword of National Security.  The size, arms, training, logistics, and demonstrated ability to project this power where needed greatly enhances a nations ability to project power and achieve National Security.

Economic power is the funding that can be wielded against an enemy, or even friends. It allows a nation the ability, should it need to, to act independent of any other nation.  It enhances diplomacy, helps gather information, and builds a strong Military.  Without it a nation will not last long.

Energy Security is a mainstay of modern nations.  Without energy industry does not create anything, products do not move to consumers, armies do not fight. A nation must have its own source of abundant energy to claim Energy Security.

The importance of Energy can not be understated, it is the vital to the survival of any nation. The following video is a presentation by Congressman Allen West, Colonel US Army (Ret). during the RNC as part of the NewtUniversity series.