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The evidence in the report makes clear that we are about to enter a period in which liquid fuels will be in short supply. Certainly other types of energy will come available, but alternate energy sources cannot be substituted for liquid fuels. For instance, trucks cannot run on electricity. The choice is either to let the price rise and let price restrict demand to the amount of supply, or increase supply. It is possible for the United States to simply allow the price to rise but repercussions are unpleasant. American demand would then suck liquid fuels from developing countries. The US would see a contraction in US economic activity as trading partner’s economies became choked by lack of liquid fuels. The resulting political instability would create social havoc around the world. With this choice, the US economy would suffer a lower growth rate or perhaps a negative growth simply because the higher prices for liquid fuels would force up the prices of everything. The other alternative would be to increase the supply of liquid fuels. Ok, so what would be the cost of such a program? Let’s do the math, but keep it simple and use constant dollars (no inflation). Since nobody has precise numbers, approximations are all one can do. A coal to liquids plant that produces about 150,000 barrels of Synthetic fuel costs something like $5 billion. It takes 5 years to build and lasts about 20 years. During the 20-year period, additional capital investment will be needed which probably will equate to the cost of the original plant. So total capital cost over 25 years would be $10 billion. The plant would be financed by equity and debt. While the equity investors may demand returns of 15% or more, the debt part would bring the cost to an average of perhaps 7.5% (a somewhat low figure but easy to handle). For simplicity, the financing can be viewed as $5 billion over 25 years and $5 billion over 10 years. The cost per year for the 25 years would be $1.17 billion (not the 20 years of production). The allocation of the capital costs on each barrel produced over the 20 year period would be about $16.90.
Total production would be 150,000 barrels multiplied by 365 days per year times 20 years. The premium on each barrel produced would be the total capital cost divided by the total barrels produced: $16.90. This does not include operating costs (or feed stock) and taxes. The cost of coal at $30 per ton and produces 2.5 barrels adds $12.00 for a total of $29.00 per barrel. Add other operating costs that should be about 30% and the total would be about $37.00 per barrel. The usual response by political bodies in the past has been to ‘ease the pain’ for the political body and supposedly for the consumer by inflating the currency. For each 1% of inflation the capital and feedstock cost of the barrel goes up by $1.25. That means 1.25% more pain for each 1% of pain easing. To calculate the capital investment needed to overcome the deficit of 25 million barrels per day of liquid fuel projected by the Hirsch study is simple. The investment total in constant dollars would be 25million barrels divided by 150 thousand barrels times the cost of the 150,000 barrel facility for a total of $4.5 trillion dollars. The amount would be payable through the premium on each barrel produced of $16.90 per barrel. In order to obtain the investment, oil must stay over $40 per barrel with no inflation. The Hirsch report envisions other sources of liquid fuels, but I am assuming the capital cost will be similar. The Hirsch report estimates the deficit to be 25 million barrels per day will occur within 15 years so we can even calculate the approximate investment needed over the 15-year period. That is about $283 billion per year. The amount needed is just 1/3rd of the current account deficit. Calculating the cost raises the question of whether or not the US should build coal to liquids plants using foreign capital or import the fuels from sources abroad. If imported from abroad, the production facilities would be built using foreign capital also remaining abroad. No silver bullet is available. Capital will have to come from somewhere. Either America will have to shoulder the discomfort of making this investment instead of consumption, and do so voluntarily, or the cost due to shortage of liquid fuels will force the investment by the world, but at much higher costs. The reality is that the savings per capita needed to fund such a program in America would be about $750 per year per capita. For a family of 3 the cost would be $2,300. Other questions abound. If America does not step up to the plate with capital creation, could the developing world afford such an investment? If American excess consumption continues, can the world savings also bear the burden of the necessary investment in liquid fuel production? If American savings are at zero, where will the $750 per capita come from? Would it be cheaper to cut our losses in Iraq and concentrate on synthetic liquid fuels? Is there any way to “grow’ our way out of the problems presented by fuels shortfalls? Are there investment opportunities or will the world economies collapse because the lack of liquid fuels in the world economy creates economic conditions that preclude service of current debt? I leave those questions to smarter minds than mine. I sure would like to know your calculations and thoughts.
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