Advancing a Free Society

There is a revolution going on in America, but it is not driven by the tea party or the Occupy Wall Street protests.

Instead, massive new reserves of gas, oil, and coal are being discovered almost everywhere in the United States, thanks to revolutionary methods of exploration and exploitation such as hydraulic fracturing (fracking) and horizontal drilling. Recent prices above $100 a barrel make even difficult efforts at recovery enormously profitable.

There were always known to be additional, untapped reserves of oil and gas in the petroleum-rich Gulf of Mexico, off America’s shores, and in the American West and Alaska. But even the top energy experts never imagined just how vast was the energy there—or beneath far more unlikely places such as South Dakota, Pennsylvania, Ohio, and New York. Some studies suggest that the United States has now expanded its known potential gas and oil reserves tenfold.

The strategic and economic repercussions of these new finds are staggering, and remind us how a once energy-independent and thereby confident American economy soared to world dominance in the early twentieth century.

America will soon again be able to supply all of its own domestic natural gas needs—and do so perhaps for the next ninety years, at present rates of consumption. We have recently become a net exporter of refined gas and diesel fuel, and already have cut imported oil from OPEC countries by one million barrels per day.

Continue reading Victor Davis Hanson…

The venerable New York Times has been a reliable cheer leader for electric and hybrid cars in its A “news” section. Its "Business Day" section is for readers who base business decisions on what they read. They don’t want to be bothered with political correctness – just the facts. Except for a slip here or there, there is little difference between the Times Business Day and Wall Street Journalbusiness reporting. With its table “The Cost of Higher Fuel Economy,” the Times has blown the cover of the electric or hybrid car. They do not make economic sense even at much higher gas prices.

I see that Drudge has picked up this story. Now everyone will know the house of cards on which the Volt is built.

In its Payoff for Efficient Cars Takes Years (April 5), the Timespublishes a table that shows that buying an electric or hybrid car makes little business sense as compared to buying the closest conventional model from the same manufacturer. For example, a buyer choosing between a Chevy Cruze Eco and a Volt requires 27 years to break even. The best buy appears to be the Jetta TDI (which sells for only $500 more than the conventional Jetta) and breaks even in a year.

It takes much too long for the fuel savings to pay for the higher sales prices – even at $5 or $6 gas. It would take $12.50 gas to make the Volt a decent buy even after the $7,500 government credit.

The Times article concludes that people buy Volts and Fiesta SFE’s because it makes them feel better and more civic minded. That is not a very solid foundation on which to build a market.

More or less every American president starting with Dwight Eisenhower, and prioritized by Richard Nixon, called for American self-sufficiency in energy sources. In fact, America is now about self-sufficient in natural gas, and America’s oil imports have declined as a fraction of its total oil consumption from a peak of 60% in 2005 to about 50% in 2011. Part of the decline is due to the Great Recession’s effects on US output and automobile use. Another part is due to rising prices of oil that reduced oil imports, but increased spending on these imports. A third and growing part is due to increased domestic production of oil and especially gas that is likely to continue to grow rapidly during the next decade.

The main reason for the expansion in domestic gas and oil production is a technique called “hydraulic fracking”. Texas wildcatter George Mitchell was the most important person responsible for the development of the fracking method to extract gas from shale formations in the 1980s. This method uses large quantities of water under high pressure with added chemicals to crack open rocks and extract the gas, and sometimes oil, hidden in these rocks. The cost of using fracking for natural gas extraction has become so competitive that most US natural gas production comes from fracking. As a result, the price of natural gas has fallen from a peak of about $10.80 per million BTUs to $2.20 currently. Instead of building terminals that could import liquefied natural gas, energy companies are now trying to export more natural gas. US natural gas inventories are so bloated there is a possibility that the price temporarily could be forced down toward $0, or even to a negative level.

Continue reading Gary Becker…

This is from Jim McTague, “Obama is Humbled by the Market,” Barron’s, March 24, 2012. Greg Mankiw linked to it this morning. I’m guessing that what caught Greg’s attention was the article’s advocacy of a tax on gasoline. I won’t bother revisiting that well-worn debate.

Instead, I want to focus on a paragraph that I bet Greg didn’t focus on, the one I reproduced above. I wrote about a similar proposal, a variable import fee on oil, in two articles (here and here) in the Energy Journal in 1989. A variable gasoline tax is not quite the same, but it would have a similar unintended, but completely predictable, consequence.

The argument I’m about to give rests on the assumption that the world oil market has an entity in it, OPEC, that has some market power. If you don’t believe that, then you won’t find the rest of the argument convincing. But notice that McTague does believe it. Check the quote from his article above.

Continue reading David Henderson…