Here are a few recent articles that help me understand what is happening in the open frontier of energy. Two articles on the damage from ethanol and a view of Cowboyistan. Also cool pictures of North Dakota.
3/10 – Robert Bryce at New York Times – End the Ethanol Rip-Off – In addition to the environmental damage from tearing up grasslands, harm to poor people world-wide, damage to small engines at 10%, and damage to most car engines at 15%, burning corn to power cars is wasteful economically.
The article explains ethanol has ~76K B.T.U.s per gallon while gasoline has ~114K B.T.U.s. So it takes about 1.5 gallons of ethanol to get as far as you can on a gallon of gas. At a 10% blend, that means you have to buy about 5% more fuel.
Ethanol is much more expensive. Combine the two factors and ethanol is about 2.4 times as expensive as gasoline on what the author calls an energy-equivalent basis.
Author calculates that out to an extra $10B a year across the US economy, or about $47 per driver per year.
For perspective, compare the cost of ethanol to the cost of federal elections.
What could you do with ten billion dollars, which is the amount wasted on ethanol?
According to this site (which was the first one I found that had the info I wanted so I stopped looking), the cost of congressional elections was $3.6B in 2010. The cost of congressional and presidential elections in 2012 was $6.3B. So the federal elections in 2010 and 2012 cost $9.9B.
Construction cost of the newest aircraft carrier, the U.S.S. Gerald Ford, is estimated at $12.8B per Wikipedia.
In other words, the waste every year from the ethanol travesty is equal to what we spend every four years for federal elections. The direct waste from ethanol is four times the cost of having elections. And that doesn’t count the harm to poor people around the world from rising corn prices or the carbon impact of tearing up grasslands to grow more corn.
Here’s a comparison to please and irritate everyone on both sides of the ideological spectrum: if we could end the ethanol tax and somehow redirect that to the federal election campaigns, we could remove all private money from the federal election cycle with enough left over to buy a new aircraft carriers every congressional election off-year.
3/4 – Autoweek – Jay Leno hates ethanol – Apparently ethanol destroys vintage cars. When it finally eats through the fuel pump diaphragm, gas pours out on the engine block causing a fire.
It eats through the fuel line and loosens the sediment in the gas tank, which puts all that gunk into the engine. Ethanol absorbs water from the atmosphere, so when there is gas left for a month or two in the tank with an unsealed system, the car won’t start because it absorbed too much water. Also strips the liner off gas tanks in old motorcycles.
3/9 – Forbes – Welcome To Cowboyistan: Fracking King Harold Hamm’s Plan For U.S. Domination Of Global Oil – Major interview with Harold Hamm. He is painting picture of the constellation of companies working in Bakken, Eagle Ford, and Permian constituting the Cowboyistan region of the oil industry. Combined, their output would be seventh largest oil producer on the planet.
Analysts at Continental project that without any cut in rigs the Bakken output would go from 1.2M bopd to around 1.5M bopd by the middle of 2016. If the number rigs dropped by half through the middle of 2015, production would rise until late spring and then slowly declined to 1.05M bopd in the middle of 2016. Intriguing thing to me is a 50% drop in rig count will only drop production in the next 15 months by 0.15M bopd.
Mr. Hamm foresees a round of creative destruction. Discussion in the article suggests that weak companies will be taken out. From the article:
Likewise, this oil bust will inevitably bring capital destruction and kill off overleveraged companies that overpaid for poor acreage.
Hmm. Overleveraged. Overpaid. Poor acreage. Not a formula for success when the inevitable crunch comes.
What really caught my eye is the efficiencies gained in recent years. Service providers are dropping prices between 20% and 30%, albeit under severe pressure. Mr. Hamm thinks wells that would have broken even at $48 before will wind up with breakeven at $40.
Time to drill a well is down from 45 days in 2003 to 17 days now. Today a rig can drill 2.6 wells in the time it would have taken to drill 1 a decade ago.
Total expected production from a well has increased from 350,000 barrels five years ago to around 750,000 on average today. That’s more than double the payoff for that huge initial investment.
Vern Whitten Photography – Rigs, Landscape, Infrastructure & More – Fantastic photos, as always. Check out photo #5. I count 6 drill rigs assembled with equipment in place for three more with the rig either ready to set up or being rigged down. Hat tip: Million Dollar Way.