basic reactor technology has not advanced, but important innovations have been made in fabrication, which have brought costs down considerably, though not as far as the Jersey Central costs. Time will tell where in the present range of 24-28 cents the costs will settle. Moreover, the costs expected by Jersey Central assume a 20 per cent excess of actual capacity above the guaranteed capacity of 515 megawatts. At the lower figure, it is clear, the nuclear plant has little advantage even for Jersey Central. For smaller capacities, the nuclear plant becomes rapidly and substantially more expensive. In some parts of the United States, distance plus high loads will make nuclear power competitive even at current technology and prices. The Jersey Central report is at least as important for its current information as for its cost predictions. The company's current coal prices are around 29.5 cents per million BTU ($7.73 per short ton for coal, $1.80 per barrel for fuel oil). This is well below the prices ruling even as late as 1962. When considering the new plant, Jersey Central received firm offers of a long-term contract for coal at 26 cents ($6.80, equated to $1.59). Moreover, in accordance with informed opinion now [10], they expect coal prices at the mine to drop through 1980 because of new machinery and increasing concentration of coal output in the more mechanized and more productive mines. Moreover, although large savings in rail freight have already been realized by running trains of conventional hopper cars as units, an additional 15 per cent reduction, or more, is expected when the new 100-ton special hopper cars come into operation, with some operating novelties which their use permits. The reduced nuclear reactor prices may be much more important for Western Europe and Japan than for this country. Even at the more conservative estimate of 28 cents per million BTU, it is evident that the ceiling for heavy fuel oil in Western Europe cannot much exceed $1.74 per barrel, which is about what it now fetches in open-market sales, both at the North Sea ports and in the interior, thanks to the new crude pipelines leading to inland refineries. It is yet another nail in the coffin of most European coal. If, therefore, we have to appraise the role of nuclear power up to now, then even if we supposed that no nuclear plant was worth building today, the investment in nuclear development has probably already paid off. For it was the railroads' and coal operators' fear of nuclear power that jolted them out of a selfpitying routine not unlike the independent oil operators', and led to the present delivered coal prices, which are expected to go even lower. Both coal and railroads were suffering a profit squeeze; they "deserved" and needed higher prices and profits in order to generate the funds needed to modernize and reduce costs to serve the national welfare and security . . . and so on. But the threat of losing markets coerced them into cutting costs to improve profits; and where there was money to be made, money was found. A great deal of United States coal, much more than one would have guessed only two years ago (up to the winter of 1962-63), is going to survive in the fuel market. I suspect the best judgment will in retrospect be that of the President of Rochester & Pittsburgh Coal Company who said that unless breeder reactors appeared, with coal at 25 cents per million BTU, coal would keep most of the increase in electric power output, while at 22 cents no nuclear plant would pay [25.]. If oil prices continue indefinitely at present levels, and coal merely keeps pace, then in Boston the equality between fossil and nuclear plants is getting close. But if we consider the competitive supply price (including of course a development profit and substantial rents) at which oil could today be landed in Boston, nuclear plants would not be competitive even in 1980. (Even this, it must be stressed, is earlier than I expected late last year.) But looking that far ahead is not too rewarding. The market price, though I expect it to decline, will probably continue to be held above competitive supply price. And if I am mistaken, if governments of producing and of most consuming countries do succeed in maintaining present oil prices indefinitely (the oil companies can do even less to maintain prices in the future than in the recent past), then to be sure, a large-scale campaign aiming at plants in service even before 1975 is sensible, even though it is an economic waste. It will probably be undertaken in any case. There is a second source of possible error in my estimate. Long-run incremental development cost is an increasing function of output in relation to reserves. I think the supply of oil in known deposits, available at the cost of development, is adequate to any likely demand over the next fifteen-odd years. But the longer the time period over which a forecast is made, the greater the probable error. I may well be wrong in assessing the complex supply-demand mechanism. This ought to be, but is not yet, the happy hunting ground of the econometricians. Sometime after 1975, though in my opinion surely not before, the rate of discover may fall so far behind production that replacement cost will again be positive, development costs will rise, and total supply price amount. Nobody knows when or whether this will happen. There should be respect and support for those who are trying seriously to understand the process of finding petroleum reserves, and to estimate future availabilities, but their guesses are not yet knowledge. Faced, therefore, with uncertainty about the future amount, and therefore the future unit cost, of petroleum, we might well wish to take out insurance and act as if sometime after 1975, though not before, the cost of fossil fuels will start going high enough to make nuclear plants widely competitive. [see 29.] If it is prudent to assume, though it is wrong to predict, a true scarcity, rising real costs, developing past 1975, then current nuclear developments of known technology ought to be de-emphasized in favor of intensive research on the new fast-breeder reactor techniques which promise much lower costs, but are much further from commercial operation. This would be insurance against the scarcity which may possibly come, not waste of resources adding to the plenty which is here today. But the actual prospect is for more duplication and hence increasing over-supply in the world energy market, especially the world oil market, with substantial economic wastes, and with a constant and politically dangerous struggle, among companies and governments over markets and between companies and governments over the division of profits. The time of trouble may be, not prevented, but perhaps mitigated. The world oil problem is political before it is economic, but the economists' contribution is not therefore contemptible, any more than the meteorologists advising the commanding general of what he can or cannot do, without presuming to say what he should or should not. REFERENCES [1] M. A. Adelman, The Supply and Price of Natural Gas (Oxford, Blackwell, 1962), cited as SPNG; "The World Oil Outlook," in Marion Clawson, ed., Natural Resources and International Development (Johns Hopkins University Press, 1964), cited as NRID; "Oil Prices in the Long Run," Journal of Business of the University of Chicago, April, 1964 (translated with permission from Revue de l'Institut Français du Pétrole, December 1963), cited as OPLR. [2] Administered Prices: A Compendium on Public Policy, 88th Congress, 1st Session, Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary, U.S. Senate, 1963. There are of course a few dissenters. [3] American Petroleum Institute, et al., Joint Association Survey, Part 1, Industry Drilling Costs, 1961; Part 2, Estimated Expenditures and Receipts of the United States Oil and Gas Producing Industry, 1961 (1963). [4] Sir Maurice Bridgman, board chairman of British Petroleum, in addressing the American Petroleum Institute in November, 1963, estimated non-Communist non-United States excess producing capacity at 1.8 million barrels daily, which is 13 per cent of mid-1963 output. It is only fair to indicate a disagreement; it is not this surplus which bears on the price, in my opinion, but the ability to expand it "enormously," as he puts it, in 12 to 18 months. [5] Comité de los Nueve, Alianza para el Progreso, Evaluation del Plan de la Nación, 1963-1966, de Venezuela, Septiembre de 1963, 100-104, actually expects 1960 prices, or possibly even higher. [6] Leslie Cookenboo, Jr., Crude Oil Pipelines and Competition (Cambridge, Harvard University Press, 1957). [7] Cf. Paul M. Davidson, “Policy Problems of the Domestic Oil Industry,” 53 American Economic Review (1963). I would confine "user cost" to the finding stage. It is not logically wrong to apply it to development, but in my opinion it adds too little. [8] Warren B. Davis, "A Study of the Future of Productive Capacity and Probable Reserves of the United States," Oil and Gas Journal, February 24, 1955, p. 114, commits, I believe, the error of taking the supply of new crude oil as always a positive function of the price; this is unfounded, except under competition. [1, SPNG, 38-40] [9] Electrical World, 161 (May 4, 1964), p. 55. [10] Federal Power Commission, National Power Survey, Advisory Committee Reports No. 15, Table 1(b), and No. 21. Assumptions: 26.2 million BTU/short ton of bituminous coal, 40.7 million BTU/long ton of "residual" or heavy fuel oil, 6.65 barrels/long ton; f.o.b. Venezuela $1.55/barrel, transport cost 18 cents (Intrascale less 48 per cent), which is higher than the current long-term rate because East Coast ports are not deep enough for large tankers. See also Philip Mullenbach, Civilian Nuclear Power (New York, Twentieth Century Fund, 1962), and my review in Economica, February, 1964, cited respectively as NPS and CNP. [11] Thomas C. Frick, ed., Petroleum Production Handbook (New York, McGraw-Hill, 1962), vol. 2, ch. 38, written by J. J. Arps. [12] Robert E. Hardwicke, Antitrust Laws et al. v. Unit Operation of Oil and Gas Pools (New York, A.I.M.M. & P.E., 1961, rev.). [13] and M. K. Woodward, "Fair Shares and the Small Tract in Texas," Texas Law Review, 41 (1962), 75–102. [14] Haute Autorité de la Communauté Européene du Charbon et de l'Acier, et al., Etude sur les Perspectives Energétiques à Long Terme de la Communauté Européene (Luxembourg, 1962). [15] Paul T. Homan and Wallace F. Lovejoy, Petroleum Conservation Regulation (in preparation). [16] Interstate Oil Compact Commission, National Stripper Well Survey (annual, reprinted in various places, including [17]). [17] Interstate Oil Compact Commission, Compact Bulletin, 20 (June 1961), p. 81. [18] Jersey Central Power and Light Company, Report on Economic Analysis of Ouster Creek. 1964, especially Tables 1-3. [19] Wallace F. Lovejoy and I. James Pikl, eds., Essays on Petroleum Conservation Regulation (Dallas, Southern Methodist University, 1960). [20] Paul W. MacAvoy, Price Formation in Natural Gas Fields (New Haven, Yale University Press, 1962). [21] Petroleum, the Antitrust Laws and Government Policy, Report of the Com mittee on the Judiciary, U.S. Senate, 85th Congress, 1st Session (1957). [22] Petroleum Press Service, December, 1963, p. 445. [23] Petroleum Study Committee, Conclusions and Recommendations, submitted September 4, 1962, made public June 29, 1963, and reprinted in various places, including Platt's Daily News Service, The Oil Daily, Petroleum Intelligence Weekly, etc. The Committee professes itself unable to say whether the price reduction would be permanent, because (if I understand them properly) letting some competition into the system would eliminate all but a very few producers. The chances of this are small; but even if the whole industry were eliminated, it remains to be proved why the price would then go above the world price, unless the world industry can contrive discrimination against the United States. In fact, and regardless of whether it is politically desirable, freedom to import into this country would probably bring the world price down, not up. See [1, OPLR, 160]. Or perhaps the Committee thinks that refining is unprofitable and can only exist at current prices through subsidies from production; if so, I must again disagree. But the hint is too brief for long discussion. [24] Petroleum Survey, Preliminary Report of the Committee on Interstate and Foreign Commerce, H.R. Report No. 314, 85th Congress, 1st session (1957). [25] Potter, Charles V., Pres. Rochester & Pittsburgh Coal Co.: Informal talk before Washington Coal Club, digest in Coal Chronicle, May 1964. [26] State of Texas, Sixth World Petroleum Congress Committee, Report to Hon. John B. Connally, Governor (Austin. Dec. 27, 1963). [27] United Nations, E.C.A.F.E., Formulating Industrial Development Programs, 1961, Section 3. [28] E.C.E., The Price of Oil in Western Europe (1955). M. G. DeChazeau and Alfred E. Kahn, Integration and Competition in the Petroleum Industry (Yale University Press, 1959), pp. 66–69, 375. [29] Sam H. Schurr, "Some Observations on the Economics of Atomic Power," (Kennecott Lectures, University of Arizona, 1963), which reads as well after as before Oyster Creek. [30] U.S. Department of the Interior, Bureau of Mines, Annual Petroleum Statement. [31] Id., Office of Coal Research, The Foreign Market Potential for U.S. Coal, 1963, Appendix C. [32] U.S. Department of Justice, Report of the Attorney General ... [on] Interstate Compact to Conserve Oil and Gas, 1963. [33] U.S. Office of Emergency Planning, Memorandum for the President [on residual fuel oil import], February 13, 1963. [34] Untersuchung uber die Entwicklung der gegenwartigen und zukunftigen Struktur von Angebot und Nachfrage in der Energiewirtschaft der Bundesrepublik unter besondered Berucksichtigung des Steinkohlenbergbaus (Berlin, 1962, a report to the German Government, usually and mercifully referred to as either Energie-Gutachten 1961 or the Friedensburg-Bade Report. [35] World Oil, February 15, 1964, p. 132, 134. APPENDICES: SOME ROUGH ESTIMATES OF WASTE IN THE UNITED STATES PETROLEUM ECONOMY The theory of this calculation is that foreign crude oil is available at United States East Coast ports at about $1.25 less than equivalent domestic crude; hence if it were freely available, the price of both domestic and foreign crudes, and of their refined products, would tend to fall by about that much. Since imported residual fuel oil is not made from either domestic or imported crude, however, it must be excluded. It could be made available more cheaply by dropping the import restrictions on residual fuel oil, but that is a separate subject. briefly discussed in Part III of the text. The imports of cheaper crude would displace much domestic crude, though-for reasons stated in the next Appendix-not nearly as much as is usually supposed. If foreign crudes were to penetrate 450 miles inland, that would enable them to cover states accounting for over half of total consumption; this pipelining cost would in part offset the saring on cheaper foreign crude. Some variants on this approach are worth following up, though we lack the space to do so here. The premium on foreign crude is only about 90 cents at the Gulf Coast, since it costs about 35 cents to ship oil to the East Coast. (This charge, we may note in passing, is well above the competitive cost of moving oil, and is largely due to the restriction of United States coastal traffic to United States flag shipping which is far more expensive to build and operate. The result of this price support for shipping is two large-diameter pipelines built from the Gulf to the East Coast. This is another obvious waste, since tankers would be cheaper; but to oil companies it is the second-best.) There is little doubt that. if the Gulf Coast price fell by 90 cents and the more prolific fields were unitized and permitted to operate freely, none of them would need to shut down: but a great many small pools probably would. APPENDIX 1: Cost of excluding crude oil imports 1. Total domestic consumption (million barrels per day). 2. Less: residual imports (million barrels per day). 10.4 1 3. Equals total domestic and foreign crude oil and natural gas 9.4 4. Value of import "ticket" (per barrel) $1.25 5. Crude pipelining cost (per barrel per 100 miles). $0.02 6. Maximum penetration of foreign crude needed to take half of domestic market (in miles).. 450 7. Pipelining cost absorbed (per barrel) 8. Net premium on foreign crude ($1.25 less $0.09) $0.09 $1.16 9. Total daily consumption from domestic and foreign crude (line 3+365+$1.16) (in billions). $4 Sources Lines 1, 2, 6 from Bureau of Mines, Annual Petroleum Statement; line 4 from (1-NRID), line 5(6), pp. 26-29. APPENDIX 2: AVOIDABLE EXPENSE IN UNITED STATES A. MARGINAL AND STRIPPER WELLS, PARTICULARLY TEXAS In Texas there were on the average 92.5 stripper wells in 1961 producing 175 million barrels that year, 480 thousand b/d, 5.2 barrels per well per day.1 Assuming that it is administratively impossible to regulate these wells," we consider them en bloc, and assume that each produces at the 5.2 average. Assuming a wellhead value of $2.75/barrel, and daily operating costs of $5 (see below), the abandonment output, where operating cost just equals price, is 1.8 b/d. At an 8 per cent decline rate per annum, time to abandonment is 14 years, cumulative output of the wells is 1,494 million barrels. This affords us an independent check on our calculations, since primary reserves, available at zero development costsecondary reserves will cost money to develop are publicly estimated at 1,672 million. [16.] Initial year revenues at the same $2.75/barrel from the 175 million of production were $480 million per year. Assuming the same 8 per cent decline rate, discounting at a safe interest rate of 5 percent per year, and 14 years, the present gross value of these reserves is $2.88 billion. TABLE I.-Hypothetical distribution of new district III oil wells, 1954-61 As against this, we must consider operating costs. There are some 400.000 strippers in the nation, but many of them are in Appalachia, producing less than half a barrel daily, which means that operating costs are around $2.35 per well daily (assuming $4.71 per barrel wellhead value). [28.] This gives us some idea of the lower edge of the range. For wells generally, a national average is around $6.72 (Table III), but this is of course distorted downward by the many strippers; a modal value for non-strippers seems to be around $10 daily, with much concentration around it; for shallow wells in the 2-4 thousand range, with no unusual problems, the variation seems to be between $3 and $7, so we may take $5. [11, p. 23.] Hence, operating costs in 1961 for the Texas strippers were about $169 million. Over 14 years, optimistically assuming no additional costs of workovers, nor increasing salt-water disposal, etc., again using a safe discount rate of 5 per cent, and a 3 per cent abandonment rate, present value of the expenditures to which these wells commit us is $1.39 billion. (The abandonment rate is of course much lower than the decline rate, which is to say that operating costs per barrel climb steadily as one approaches abandonment.) 1 According to [16] there were 90,893 Texas strippers the first of January, 1961, and 94.031 a year later. This is not altogether justified; see [13], pp. 90-92. |