Think New Clean Energy Costs too Much? Oil Cost $500 a Barrel at Startup

It should be obvious that it costs more to develop ANY new energy sources, than to keep using the energy sources supplied by capital investments in energy infrastructure that has been already paid off, long ago.

We are only hearing one side of this story, as conservatives bemoan the “cost” of investing in new sources of energy like solar and wind, as if dirty energy didn’t cost anything to start up too.

But a contemporary account of startup costs in the the 19th century oil business is revelatory.

Derrick’s Handbook (1898) reported that Drake had no trouble selling all the oil his well could produce at $20 a  barrel in 1859. With the 24-fold increase in consumer prices since 1859 this translates into a bit under $500 a barrel in 2010 dollars.

Just as solar prices dropped by more than 70% in just the last few years, driven down partly by the demand created by the one-time Recovery Act investment by the Obama administration – and because the rest of the world (unhampered by Koch-funded plutocracy) has gotten serious about preventing climate change, and implemented much more sustained renewable energy policies – as more oil came on the market, the price of the new found “rock oil” from more wells dropped by about half, and then continued to drop as the industry established itself over the next fifty years.

“As other wells brought more of the product to the market, the price quickly fell, averaging $9.31/barrel for 1860. In 2010 prices, that corresponds to $232 a barrel, still far above anything seen subsequently. Even ignoring the initial half-century of the industry, the price of oil in real terms continued to drop from 1900 to 1970”.

When we discovered the apparent energy miracle of oil, we had no idea about what its true costs would be, in long-term climate catastrophe. There was no cheaper alternative at the time. There was no entrenched energy sector to compete with, no lobbyists and media moguls to represent their interests. So, in the 19th century, market forces alone, with no competition, were able to drive down the costs of oil.

But market forces alone won’t make us switch to renewable energy.

That is because, with oil (and coal) cheap and available and the infrastructure like refineries, drilling machinery and pipelines (and railroads and power stations) already paid for, and half the population lulled into complacency about climate change and peak oil – and a now entrenched oil and coal sector – there is no natural push to switch to renewable energy.

But we have inadvertently have gotten ourselves into a Faustian bargain – long term climate catastrophe that will impact our species caused by the carbon dioxide and other greenhouse gases emitted by fossil fuels. So, now, we need to artificially create a market force to drive down the costs of starting over, with renewable sources, that won’t impact our ability to continue our civilization. This is why the Obama administration backed VC loans to thousands of renewable energy companies around the country with loan guarantees – including Solyndra. 

This lack of market forces is why we need energy policy that drives demand for renewable energy, such as the Section 1705 loan guarantees backing private investment in renewable energy, that the Republican House conspired to let expire at the end of September – by trumping up a supposed scandal because just one of those loans (Solyndra was only 1.4% of them) guaranteed went bad.

Susan Kraemer@Twitter
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