Rising oil prices and increasing global demand is a problem that’s only going to get worse, said John Hofmeister, founder and chief executive of Citizens for Affordable Energy.
A stimulus opportunity for the nation and the world comes from private money invested in the energy future of the country, Hofmeister said at an economics roundtable discussion hosted by the University of California, San Diego.
“Releasing the economic capability of the private sector is the opportunity of a century, just as after World War II the opportunity of a century to remake America as the world’s leading manufacturer, as the world’s largest economy, as the world’s most prosperous nation — because of the spending that could occur in the private sector world and the post World War II '50s, '60s, '70s," Hofmeister said. "I’m here to tell you, the teens, '20s and '30s of the 21st century could not just replicate what we did in the '50s, '60s and '70s, but exceed it. I would go one step further — it has to. It has to. Or we decline not only economically but culturally and socially.”
His plan includes setting a target to produce 10 million barrels of oil per day, substitute natural gas for imported oil to the tune of 5 million barrels per day, which equals 30 billion cubic feet (bcf). And 40 percent of that amount can be earmarked for trucking, substituting for diesel, or make diesel from natural gas; and 60 percent could be used to either make methanol to be added to gasoline for flex fuel vehicles and use domestic natural gas in private vehicles, or build more capacity in the methanol plants to turn the methanol to gasoline, Hofmeister said.
“That eliminates 5 million barrels per day of imported oil. It says basically to OPEC, 'we don’t need you,'” Hofmeister said.
He suggested creating an independent regulatory agency for energy to do four things:
1. To make sure we have supplies of energy we need in future adequate to achieve the affordability adjectives of our population.
2. Build the infrastructure we need to move energy from where it’s produced to where it’s consumed.
3. Make sure that the environmental protections needed for clean air, clean land and clear water are equal to the task.
4. Make sure that we use every possible technology to improve the efficiency with which we consume or produce energy.
“The need as I see it, ladies and gentlemen, is fundamental – it's fund economics where investment in equals value created equals money out, growing the economy,” Hofmeister said. “The improvement in energy, domestic energy sourcing is a national security advantage. And the advantage in caring for our environment is an environmental security effort. All paid for with private money. All done with a new governance model.”
While statistics show positive growth in the number of barrels of crude oil produced per day — from 5 million barrels per day in 2008 to 6.8 million in 2012 and a prediction for 7.5 million this year — it is not enough to sustain a nation that needs 20 million barrels per day of liquids, about 16 million of crude and 4 million of other liquids, Hofmeister said.
“The net effect on increasing oil production is good, but in terms of the requirements of the nation on a daily basis, it’s incremental,” Hofmeister said. “Which means we still rely upon imports. Which means we are still at the mercy of a pricing cartel.”
Oil is the primary revenue source for OPEC nations and doesn’t have a supply-and-demand relationship with the consuming public. Without any existing threats, it is able to increase oil prices, Hofmeister said, and the increasing cost of oil for the past five Januarys has held the economy back as high gas prices serve as a depressant for middle-income families and those with less.
A “huge threat” to OPEC would be to convert natural gas into transportation fuel — which would be the first step to free up private money.
“The reason we have too much natural gas is because we haven’t figured out what to do with the abundance of natural gas that we have,” Hofmeister said.
The United States produces 70 bcf per day of natural gas, up from 60 bcf in the past decade. The number of drilling rigs has decreased from 1,500 in 2009-2010 to 700 today, according to Hofmeister.
"We have too much natural gas, we’re incrementally improving oil production, but why this incredibly high crude oil price?" Hofmeister said. "There’s no threat to OPEC. I would argue we could put a huge threat to OPEC out there in the marketplace by converting natural gas into transportation fuel.
“What's the price tag for that?" he continued. "Don’t think of it as the price tag. Think of it as the investment in jobs and the investment in the economy that’s roughly $1 trillion per year sustained for the next 20 to 30 years on a $14 trillion GDP, what’s another trillion dollars to spend? Seven percent — 7 percent growth in this U.S. economy driven by transportation fuel production to displace imported oil. When is the last time we had a decade or two of 7 percent growth? We go back to the '50s and '60s."
Global demand for oil has increased — with China consuming 5 million barrels of oil per day in 2005, 10 million in 2011 and projected to consume 15 barrels per day by 2015. India consumed 4 million in 2011 and is predicted to consume 7 million barrels per day by 2015. Instead of the 88 million barrels that are produced today, the world is going to need 98 million barrels a day to meet global demand, he said, “and I predict there will be shortages at any price.”
“As a world, we have run into technical, geopolitical and economic issues that prevent the industry from meeting world demand,” Hofmeister said.
In Brazil, oil is so deep that the pressure is too strong for today’s metals, according to Hofmeister, and oil from that source won’t come anytime soon. Hofmeister also predicts that oil from the Arctic won’t come anytime soon, and while there’s oil in East Africa, it can’t be tapped without the infrastructure in place. Criminality and corruption in West Africa make it costly and insecure.
“And then there’s the geopolitics of the Middle East, in which anything can happen on any given day, and will," Hofmeister said. "And so to count on the security of oil supplies from Iran, Iraq, Kuwait, Saudi Arabia — it’s asking a big promise with even bigger ifs, and if the Strait of Hormuz somehow get impacted, and if 25 percent of the world’s daily oil production can’t get through the Strait of Hormuz, we’re in a serious problem very, very quickly."
Electricity is also at risk, as America’s electron system — its power generation system — continues to age as the world’s oldest power generation system, he said. There are more than 600 coal plants with an average age over 40 years with a designed life over 50 years. There are 104 nuclear reactors with a permitted life of 40 years with an average age over 30. One local problem exists at San Onofre, which Hofmeister said may never operate again.
“Age matters. Age causes increased risks across any structure, process or person,” Hofmeister said. “And so age of our power generation system — yes we’re building new natural gas plants, but we have a problem with getting natural gas to where it’s never been needed. It takes pipelines. Pipelines are not easily built in this country.”
New requirements by the Environmental Protection Agency won’t result in the improvements of the aging facilities, but the decommissioning of them, he said. “Why would you invest hundreds of millions of dollars in what is already an old facility? Which is beyond its design life, in any case,” Hofmeister asked.
“From an electricity generation standpoint, I believe we’re at risk," Hofmeister said. "And as the summers heat up and the winters cool off, we get peak demand.
"It’s the peak demand period that puts the greatest strain and stress on the electricity supply system and is the most likely to create the kind of black out conditions not unlike what you experienced here a year and a half ago."