Economics, Energy and the Environment

Strange economic thinking at Princeton

Oil rig

Princeton University has a press release out trumpeting a new series of studies that demonstrate, they claim:

The United States could eliminate the need for crude oil by using a combination of coal, natural gas and non-food crops to make synthetic fuel… Besides economic and national security benefits, the plan has potential environmental advantages.

But there seems to be a bit of strange economic thinking going on here. According to the press release, researchers:

…estimated that the nationwide average cost of producing the synthetic equivalent of a barrel of crude oil would be $95.11, although the cost varies regionally. The cost in Kansas, where most production would occur, would average $83.58 for the equivalent of a barrel of crude oil.

Here’s the problem: The actual cost of producing a barrel of regular, old-fashioned oil is far lower than that, and the differential between production costs and the world price of oil is where the profits that justify investment come from. This table from the US Energy Information Administration shows the upstream cost of producing a barrel of oil in the US and a few other countries. In most cases, it’s less than half of the costs estimated above for the new synfuel.

15,618 cubic feet of natural gas equivalent to one barrel. Source: Tables 10, 11 and 12, Performance Profiles of Major Energy Producers, 2009.

So let’s say you’re an investor wielding either private or public capital, and you have a choice: You can invest in facilities that produce oil at a low cost, you can sell it at the world price, and you can capture the profits between the cost of production and the world oil price, or you can invest in facilities that produce oil at a high cost, and offer you little in the way of profit-potential?

Well, I’m no economist, but I know where I’d be putting my money!

3 thoughts on “Strange economic thinking at Princeton

  1. This is not unusual. You often have academia try to advance a narrative that has little regard for reality because there are incentives that reward distortion and outright lying rather than showing things as they are.

  2. The “non food crop” (hahahaha) component of that would shock David Pimentel of Cornell University (a gutter school compared to “Princeton”). He has spent decades looking at the basic facts of energy received, conversion efficiency from sun to biomass, and final collection and conversion efficiency into fuel. If you think the conversion efficiency for corn is poor, wait until you try to collect non food crops…

    Here’s a little more information to help the zombies at Princeton with their basic math….

    However, a change in the renewable energy standards that allows for ethanol to be supplied from something other than biomass would be a huge boon to energy efficiency. There are processes that can convert methane to ethanol (as opposed to methanol, which is a bit more harsh on transportation systems and autos than ethanol) would be a big hit.

    As I remember, there was a reason coal gasification never took off – it was hard – even before the natural gas boom – for coal gasification to be cost effective. Now? No chance.

    So, if they rewrote their paper to talk about natural gas to ethanol and shale oil, I think they would be correct! Only a slight adjustment. Surely that can be taken care of in peer review… Oh, wait, it already went through peer review?

    Man, some of these peers are morooons (as the great Philosopher B. Bunny often would say…)

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