Locus Medius

Ethanol = Cure for Obesity?

I was just listening to an NPR piece about how the increased demand for ethanol, due to federal mandates, has pushed the price of corn up.

Suddenly it occurred to me how great this is for the current obesity problem. One of the key factors in the obesity epidemic is that U.S. farmers grow significantly more calories than we can eat. Much of this is in the form of corn products. The proliferation of high-calorie, low-priced food can be directly related to the vast availability and low price of corn by-products -- corn syrup most especially.

I haven't read it yet, but Michael Pollan's book The Omnivore's Dilemma: A Natural History of Four Meals extensively discusses our dependence on corn. Apparently, much of what we eat can be traced back to a corn field in Iowa. And much of the foods involved are not particularly healthy -- junk food, fast food, red meat, etc.

So maybe we'll get some positive health effects out of this ethanol craze.

Gas Prices by County

Murdoc's got a great post with a map of U.S. mainland gas prices by county. I find the map very interesting. Something is clearly up in the midwestern states and New York. My guess is tax rates, since these are prices at the pump.

The west coast is also significantly higher. Since that covers a broader geographic area, I hesitate to attribute it to tax rates, since it could also be a supply/distribution issue in the fast-growing west. It wouldn't surprise me if those states also have higher taxes, though.

Murdoc also makes the comment:

I guess we'll see what they do in the coming weeks, and if they shoot back up you can be sure we'll be hearing all about how the GOP manipulated them down for the elections. And it might even be true.

I, for one, do not believe the GOP has been manipulating anything associated with gas prices. Mainly because they haven't had to. The petroleum companies have been doing it on their own. There is no question that the petroleum industry will be better off under a Republican congress, and they know it.

And I don't even believe this is a matter of collusion. It's only collusion if the companies get together and agree to do something. In this case, I believe they are all doing it because it is so obviously in their best interest; they don't have to get together and discuss it. Their best interest is for Republicans to retain as much influence as possible and they know that lower gas prices will help achieve that goal.

Hydrogen Ethanol Methanol

There's been a fair amount of coverage over the last week-or-so of George Olah's new book Beyond Oil and Gas: The Methanol Economy.

George Olah holds the Donald P. and Katherine B. Loker Chair in Organic Chemistry at USC and is the 1994 winner of the Nobel Prize in Chemistry. His new book examines what he believes is the vastly superior potential for methanol as a future transportation fuel over ethanol or hydrogen.

MIT's Technology Review ran an interview with Professor Olah as did NPR's Science Friday. Note that the NPR interview is long and rambling so, even though I linked to it, I actually do not recommend listening to it.

We all know why a replacement for gasoline is needed. We do eventually need to transition to a fuel source that is renewable. The strategies currently under discussion for replacing gasoline are predominately hydrogen and ethanol.

Oil Companies Not Investing?

In a comment on Murdoc's site, ACE pointed out this Forbes article which laments the fact that oil companies are not investing in new fields at the pace that many people would hope for, based on the current oil price of $70 per barrel.

The oil companies point to $106 billion spent this year so far on capital investments, but the article points out that this is far from enough to maintain current extraction levels, let alone grow the supply.

The article points out that this clearly implies that the oil companies do not believe $70 per barrel, or higher, will continue for a long period into the future. They quote an analyst guestimating that the oil companies are assuming $40 per barrel plus inflation over the long term.

They propose two explanations for why the oil companies assume this lower number, while I would add a third.

ACE Oil Coverage

ACE has a lot of good coverage of the current gas/oil price debate, including this post on Exxon's recent profit.

One thing I disagree with ACE on is the portrayal of accounting as a "shell game". I would generally try to stay away from that type of bias. Also, his discussion of tax reserves seems a little simplistic. Companies have to take those reserves to account for the difference between tax accounting and GAAP ("Generally Accepted Accounting Principles") accounting.

Gas Profits

Murdoc has a post up that he claims shows where the real gouging is at the gas pump. His analysis shows $0.08 per gallon profit to the oil company, $0.01 per gallon profit to the gasoline station operator and $0.59 per gallon of taxes. His numbers come from this article at the New Media Journal via this post at Wizbang.

He goes on to ask "Why aren't we hearing this side of the story?"

Unfortunately, Murdoc has been snookered by a clever trick. The nutjobs at the New Media Journal waved their hands and decided to conveniently ignore the largest profit item in the oil business: exploration and extraction.

Here are the numbers Murdoc is working off of:

Notice how the profit he is discussing only includes the profit on refining and delivering gasoline to the customer. It completely ignores the profit associated with extracting crude oil from the ground and delivering it to refineries. The $1.71 of crude costs assumes $0 in profit. Because it is the cost of crude which is currently driving gasoline prices, of course one does not find excessive profits if one only focuses on the refining and delivery component of the equation.

Here's what the graph would look like if you included extraction profit. In these numbers I am assuming that the $1.71 for crude is based on $70 per barrel crude. Also that extraction costs are approximately $40 per barrel of crude — a number that both sounds about right and that I think I remember hearing on the radio. Considering recent historical per barrel prices, I sincerely doubt crude extraction costs any more than that. There's a lead time to developing oil fields and no one was assuming much above $50 per barrel prices a couple years ago. (What I mean by that is that no one would have green-lighted the development of an oil field where extraction would cost more than $40, so there are likely to be few, if any, fields where the costs are that high). So, bottom line, I am assuming $30 of profit for every barrel of oil, or approximately 43% of the cost of crude, resulting in $0.73 of profit for every gallon of gasoline.

So profits currently dwarf taxes. And, furthermore, taxes have not changed in years, so it is certainly not taxes that are driving the change in gasoline prices.

Update: I meant to address this comment by Murdoc, as well:

Big Oil puts out the money to make it all happen and reaps eight cents. Government does virtually nothing whatsoever and simply collects fifty-nine cents every time we pass 'Go'.

Government uses that money to build and maintain the transportation infrastructure. Hardly "nothing whatsoever".

It's Possible to Save Gas Without a Drastic Change in Lifestyle

Donklephant has posted ten suggestions for how to save gas. None of them involve major change in lifestyle, although some do require changes to your driving style (e.g. "Do not make hard stops and fast starts.")

The only one I partially disagree with is the suggestion to not use cruise control. I think one of the comments has it right: on flat stretches, cruise control improves gas mileage because the car stays at a constant speed, while on hilly stretches cruise control hurts gas mileage because it makes you go faster up hill than you naturally (and unconsciously) would if you were controlling the speed manually.

It would be great if people could cut their gasoline usage by large percentages, such as 10-20%. However, we should keep in mind that if we could even shave a couple percent off our gasoline usage, we would probably have significantly cheaper gas. I say this because the way markets work for a commodity like gasoline is that even a little bit of oversupply tends to foster competition that forces prices down. Only when supply gets very tight do the prices suddenly spike. A couple percent could make all the difference in this dynamic.

The great failure of the environmental movement, in my humble opinion, is the impression that many people have that solutions are all-or-nothing affairs. It is still helpful to reduce your gas usage by 2%, your electricity usage by 3% and recycle your aluminum cans, but otherwise keep the same lifestyle.

The movement as a whole, however, has tended to create the impression that people have to make wholesale changes in their lifestyles. The end result is that people do nothing. It's really a shame.