Monthly Archives: February 2011

Obama’s Administration Policies Wont Lower Gas Prices

Whenever the price of gasoline takes a sharp rise, I get a flood of emails that have some scheme to beat those wascally waiders of our pocket-book–the usual suspect is Exxon/Mobile.   The scheme calls for us to not buy from Exxon or who ever the scheme writer doesn’t like.   Then this narrative says that to get back into the market the target company will have to lower prices thus start a price war.  This scheme might lower prices a few cents per gallon over time but it would not be  significant.  A more effective scheme would be for automotive community to drive 10% fewer miles each month.  The recent recession did affect supply and demand enough to make a significant change in price.  But now that we seem to be climbing slowly out of this really bad economy, we are driving more and the  gasoline prices are moving up.

Along with more miles being driven, the crude oil traders, fearing loss of producing fields resulting from the turmoil in the Middle-East,  are trying to secure their supply.  Thus bidding up of the price of a barrel of crude is underway.  Couple those two issues with the declining value of the dollar, the price  of crude is now in the vicinity of $100 per barrel.  (Remember, oil trades are denominated in dollars US.)

If the citizens of the US really want to bring crude oil prices down (and thus pump pricing) then it will be necessary to implement a program that will be at odds with the current administrations policies.  The Heritage Foundation has a proposal for doing just that: “THREE POLICY CHANGES TO HELP WITH GASOLINE PRICES” on their WebMemo blog site. The thrust of these three policy changes is summarized here:

A Familiar Pattern. When petroleum and gasoline prices shot up during the energy crisis of  1970, the experts and pundits predicted imminent resource exhaustion, skyrocketing prices, and energy poverty. Instead, markets responded by searching for, discovering, and producing enough oil to provide over two decades of low prices. For instance, in the U.S. alone, the number of drilling rigs more than tripled between September 1973 (before the Yom Kippur War and the subsequent Arab oil embargo) and December 1981. Now, imminent oil depletion and the futility of drilling are again supposedly on the horizon. However, increased drilling activity follows increased petroleum prices. Blunting this natural market response will drive up energy prices and reduce national income. This, plus the Keystone XL pipeline and scaling back EPA expansion of the Clean Air Act, would do much to stabilize gas prices and energy costs in general.

The three policy changes necessary according to the Heritage Foundation are:


  • Relatively small changes in supply can have large impacts on price, especially when markets are tight. And tight markets are what caused the petroleum price spikes of 2008 and will cause them again if production is shut down while demand from a growing world economy squeezes the spare capacity the world has enjoyed for the past couple of years.
  • The first and most obvious place to drill is where there are already drilling rigs and proven reserves— such as the Gulf of Mexico. Despite the majority recommendation of its own scientific panel, the Obama Administration stopped virtually all new drilling in the Gulf of Mexico. There have been recent signs that this policy might change. “Might” needs to be “will,” and soon.


  • The concept of “low-carbon fuel standards” is driving opposition to a petroleum pipeline from Canada.  With its oil sands, Canada has more proven petroleum reserves than any country other than Saudi Arabia. A consistent ally and long-time friendly neighbor, Canada is exactly the sort of supplier the U.S. should want to fill the gap in the petroleum it cannot produce on its own. But some policymakers want to put these vast reserves off limits to American consumers.
  • The Keystone XL pipeline would bring the U.S. over a million barrels of petroleum each day—more than it imports from either Saudi Arabia or Venezuela (the U.S.’s two largest suppliers after Canada and Mexico). Secretary of State Hillary Clinton should be applauded for her statements in support of the pipeline.  However, other components of the Administration, notably the Environmental Protection Agency (EPA), have taken steps to slow or stop the pipeline.


  • The EPA’s abuse of the Clean Air Act will drive up refining costs and, therefore, gasoline prices. Though the use of the act to regulate carbon dioxide (CO2) would create large problems in many places, the EPA recently started the process to regulate CO2 emissions from refineries. This regulation goes beyond the gasoline reformulation mandates that balkanize gasoline markets with higher-cost boutique fuels.
  • The new CO2 regulation puts an additional burden on refiners’ costs and subsequently raises prices of gasoline, diesel fuel, and home heating oil. Further, it will increase the amount of refined product the U.S. imports and reduce employment in an industry with wages that are more than 40 percent higher than the national average.

To read the Heritage blog in full  click



Many readers of these posting are familiar with the Boston Consulting Group (BCG). During the years I was active in a business management role, we used BCG to provide consultancy for some of our business ventures.  BCG describes themselves as:

BCG is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses.

I cannot speak to their specific claim to be the “world’s leading advisor on business strategy” but I believe that they are among the world’s best.

Why am I qualifying their expertise?   Because I want to use the report they issued in March 2010 as a reference: 1) to increase the reader’s understanding of the issues and 2) for demonstrating that without electricity storage, wind and solar can never make a real impact on electrical supplies.   Their report is titled “Electricity Storage—Making Large-Scale Adoption of Wind and Solar Energies a Reality”.   This report may be seen in total by clicking here.

A prior posting in this blog, WINDPOWER WITHOUT ENERGY STORAGE DOES NOT COMPUTEmakes the case that these alternative energy sources are unreliable and thus cannot be scheduled as necessary to provide reliable transmission to customers.   Our government is offering large subsidies to make these alternatives “competitive”; however, the alternatives will never be truly competitive without energy storage.

These energy sources require something to compensate for the times when the wind doesn’t blow or the sun doesn’t shine.   To compensate, the BCG report discusses four approaches for electricity storage:

  • Grid Extension
  • Conventional Backup Power
  • Demand Side Management
  • Large Scale Storage

Grid Extension “involves linking electricity grids from different regions and transferring power from one to the other to compensate for fluctuations” BCG discusses the problems with this approach and conclude that it “will likely make an important contribution. ……But grid extension is not a standalone solution for the long run.”

Conventional Backup Power is the use of primarily fossil fuel powered generation plants that are brought on line or taken off line to compensate for the swings in Wind and Solar power generation.  BCG’s report presumes that fossil fuel power is the backup and concludes that”…we do not believe conventional backup capacity will be sufficient on its own or sustainable as we move toward a renewables-dominated electricity system in the long term”. (My emphasis added).   There is great momentum for the replacement of fossil fuels, particularly in the political class, as they lust for the attendant taxing and regulating which the removal of fossil fuels from general use would entail.   There is great uncertainty in the science of man-made global warming and thus any taxing and regulating is premature in particular because we are beginning to see an unraveling of this concept at present.

BCG continues by saying “Still we believe that conventional backup capacity will be indispensable for achieving the integration of renewable energy sources into the current power system in the coming years.”

Demand Side Management is described as having customers that are willing to scheduling their production or drying their clothes or what ever around the availability of electricity.   BCG states that this will have limited value and cites studies carried out in Germany and the US  ”found that Demand Side Management offers a demand reduction potential of only approximately 2 percent of peak load.”

Large Scale Storage is the collection of excess power generated, for example, when the wind and sun are peaking.  BCG states the positives for storage “Unlike interregional compensation, storage provides a self-sufficient solution for one specific region and hence is not affected by increases in penetration of fluctuating renewables across the board.

As BCG says,  “The approach is not perfect, however.  All electricity-storage technologies are inefficient to a degree: part of the energy fed into the system cannot be discharged later on and is lost. “ BCG notes that the range of efficiencies ranges from 45% to 80% and BCG states this is a key weakness for storage.  BCG lists the following as possible candidates for commercial storage.

  • Mechanical storage which encompasses pumped hydroelectric               storage, compressed air, and flywheel energy.
  • Thermal storage encompassing hot water, molten-salt, and phase change material storage.
  • Electrical storage including supercapacitors and superconducting magnets
  • Electrochemical storage including flow and static batteries.
  • Chemical or hydrogen storage

BCG looks at the pros and cons of these candidates and you can read the full report and make your own judgment about which ones, if any, will be the winners.

BCG further says:  “While the business case for investing in storage is currently weak, that situation will necessarily change.  Today’s fluctuations in generation are compensated for relatively easily and cheaply by flexible conventional power plants, but the march toward a fossil-fuel free energy landscape continues:……”  and “Wind and solar PV are the most competitive and widely available renewable sources and will certainly account for the lion’s share of the renewable energy produced—-and they require storage to be viable.”

The report is a good source for background information and, and in my view, it supports the obvious conclusion that wind and solar are, at the current time, largely an unnecessary expenditures that the ratepayer must endure.  Two issues are yet to be resolved.  Firstly, to be technically and economically viable electrical storage facility will have to make their way into the system.  Hopefully not, as the BCG report supposes, through yet more subsidies but rather at a time when the market forces are such that these energies are the logical, economic way to go on their own merit.   The second issue is that question of man-made global warming (AGW) theory and the part it is playing.  In my view the time frame for these renewables to make their way into the market should not be predicated on being supported by such a slender reed as AGW.   I believe these renewables will take a hit that will set them back many years when the rate payer revolts against the high price and unreliable delivery brought about by non-economic, government mandates.