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.
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!