Risk Reduction - A Good Investment First in a series that looks at two of the risks associated with fossil fuel dependence

Following installations will look at the cost to society of fossil fuels and the alternatives available to businesses and homeowners today.

Whenever a business is able to reduce its dependence on a finite resource by increasing efficiency and/or shifting to a renewable resource, it is reducing its future risk of higher prices or resource scarcity.

Sometimes this may require an upfront investment into new technology, retraining employees or the time required to change processes. The payoff comes in reduced cost for resources and reduced risk. 

The risk side of fossil fuel dependence manifests typically in three ways: increased costs, loss of access, and costs borne by society as a whole. This article looks at the first two risk factors.

Increased cost - A March 12th 2012 Seattle Times Article "Oil rises to near $107 amid improving US economy" referred to the expected rise in the cost of oil as speculators anticipate a seasonal rise in demand coupled with supply concerns. "'Global spare capacity has been dwindling, and crude demand is about to start rising seasonally,' said Citigroup." 

All oil produced, regardless of source, goes into the global market. Prices set are outside the control of the President of the United States, or Congress or even the commercial companies that extract the oil. There are 12 member countries in the Organization of the Petroleum Exporting Countries (OPEC) whose production-fixing decisions influence the global price of oil. Saudi Arabia has the largest reserves and can adjust its production to suit market conditions and to ensure prices stay within—for the Saudis—a desirable range.

The state of Alaska extracts and refines enough oil to serve all of the state's needs yet drivers pay more at the pump than in most areas of the country. Why? Because the refineries in Alaska have to pay just as much for the oil taken from the North Slope as they would if the oil came from Venezuela or Saudi Arabia. 

A current check of gas prices on www.gasbuddy.com showed prices in Anchorage Alaska near Elmendorf Air Force Base at $4.27 gallon. 

World oil prices explain why gas prices remain high in the United States even though the US recently became a net exporter of refined petroleum products for the first time since the 1940s. The growth of fuel demand in Latin America is one reason why the U.S. recently became a net exporter of petroleum products (although the U.S. is a net importer of crude oil. In 2011, the U.S. produced 5.6 million barrels per day and imported 8.9 million barrels per day.)

A shift away from fossil fuel based transportation and shipping would provide an alternative to being shackled to the dictates of the global oil market.

Loss of Access – In that same March 12th Seattle Times article, the unstable political situation among Middle East suppliers was cited as a supply concern. "The inflammatory rhetoric between the U.S. and Israel and Iran show no sign of abating,' said Citigroup."

Iran is OPEC's second-largest oil producer after Saudi Arabia and its southern border lies along the Strait of Hormuz, where supertankers carry crude from the Persian Gulf to the rest of the world. The current ebb and flow of political wrangling between the U.S., Israel and Iran will likely be a recurring supply issue for years.

Oil is not a renewable resource. There is speculation that the oil reserves held by Saudi Arabia may not be as robust as claimed. The book "Twilight in the Desert" by Matthew R. Simmons attempts to plumb the depth of secrecy surrounding Saudi oil production using more than 200 technical papers written for the Society of Petroleum Engineers to create a field-by-field assessment. Verified shortfalls in their production and potential are at odds with unverifiable Saudi claims.

"Twilight in the Desert" was published by John Wiley & sons, Inc., Hoboken, New Jersey in 2005. Matthew R. Simmons was Chairman and Chief Executive Officer of Simmons & Company International, a Houston-based investment bank that specializes in the energy industry. Mr. Simmons passed away in 2010.

The current boom of oil and natural gas production in the U.S. is partly the result of the use of "fracking," a way of extracting oil and gas that lies in shale rock formations by pumping chemicals, sand, and water into the gas and oil reservoirs to crack open the rock formations and force the fuel to the surface. When the wells drilled down through our drinking water aquifers are properly sealed to prevent the chemicals from leaking outside the well bores, the fuels can be extracted without putting our drinking supplies at risk. Unfortunately, current regulations do little to protect communities from unethical practices by companies with poor performance records. (More on that later in next week's posting)

The cost of extracting oil and gas using fracking is much higher than the traditional wells closer to the surface that have for the most part been tapped out. The cost for natural gas or oil has to remain high enough to be able to keep a profit margin after expenses.

The production evidence for these wells shows an initial high rate of production that drops off very quickly. The lifetime use of the wells is also very short compared to other forms of oil and gas extraction.

The New York Times reviewed thousands of pages of documents related to shale gas, including hundreds of industry e-mails, internal agency documents and reports by analysts. The public can review these documents that compare the public industry claims to the internal doubts and comparisons of Shale Gas to the Enron scandal and Ponzi schemes.

In a March 17th, 2011 email exchange between a federal energy official and a Chesapeake Energy geologist, the Chesapeake geologist corroborates the idea that there "should be skepticism about the life of the wells."

In another email: "You are completely correct about questioning the life of these wells. Our engineers here project these wells out to 20-30 years of production and in my mind that has yet to be proven as viable. In fact I'm quite skeptical of it myself when you see the % decline in the first year of production."

Next week: Costs paid by society and the alternatives available to business and homeowners today.