10 Sep 2008

Pickens Plan Too Cotton-Pickin Expensive

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Below is a back-of-the-envelope calculation of the upfront cost of the Pickens Plan. To demonstrate that it is outrageously expensive, even on its own terms, I show how much cheaper it would be for the government to expand the Strategic Petroleum Reserve in order to provide comparable protection from foreign surprises. It should go without saying that I am not endorsing an SPR expansion, I’m just showing that it would be a lot cheaper than covering the US with windfarms and converting the transportation fleet to natural gas.


Pickens’ Plan Versus SPR Expansion:
A Crude Cost Comparison

T. Boone Pickens has launched a major media blitz promoting his “Pickens Plan” to expand wind power for electricity generation, freeing up America’s natural gas to be used in the transportation sector. Both in his radio ads and recent letter to the Wall Street Journal, Pickens emphasizes that his plan “buys us the one thing money can’t–time.” The idea is that it will take decades to completely wean ourselves from our “addiction” to foreign oil, and in the meantime the Pickens Plan is to serve as a bridge during our remaining years of vulnerability.

As with several other components of his bold plan, Pickens’ ideas on “buying time” are flawed. In fact, with enough taxpayer money–and Pickens’ plan certainly requires plenty of that–you can indeed “buy time,” by expanding stockpiles of crude oil. The ostensible purpose of the Pickens Plan is to reduce U.S. vulnerability to a sudden oil import disruption, during the decades that we transition to complete energy self-sufficiency (presumably through hybrid cars, biofuels, etc.). Yet an alternative way to protect the country against sudden disruptions in oil imports, is to expand the Strategic Petroleum Reserve (SPR). In this short analysis, we will show that back-of-the-envelope calculations indicate SPR expansion would be a far cheaper way to “buy time” than the Pickens Plan.

What the Pickens Plan Achieves, and What It Costs

When one analyzes the specifics, the Pickens Plan actually doesn’t promise that much. In its concluding section, the plan states: “Building new wind generation facilities and better utilizing our natural gas resources can replace more than one-third of our foreign oil imports in 10 years.” This is an important point: The Pickens Plan does nothing in the beginning years; its “bridge” has to first be built. Remember that the plan calls for “[b]uilding wind facilities in the corridor that stretches from the Texas panhandle to North Dakota [to] produce 20% of the electricity for the United States.” But this isn’t all that is required for Pickens’ “bridge” to be ready. The purpose of this massive investment in wind-powered electricity generation, is to free up domestic natural gas supplies to fuel the nation’s vehicles. Thus, the U.S. fleet needs to be converted to handle natural gas, and the nation’s gasoline stations must be adapted as well. This is why it will take ten years before the Pickens Plan reduces foreign oil imports, and even then, only one-third of them. Now let’s get a rough idea of the costs of building this bridge.

The initial outlays for the plan are astronomical. Pickens himself admits: “Building wind facilities in the corridor that stretches from the Texas panhandle to North Dakota [comes] at a cost of $1 trillion. It would take another $200 billion to build the capacity to transmit that energy to cities and towns.”

The initial transition costs for the other component of his plan–namely, converting the motor vehicle fleet to run on natural gas instead of gasoline–are also enormous, and unfortunately Pickens here gives us no estimates. We can get some idea by comparing the prices of the NG Honda Civic–touted by the Pickens Plan–versus conventional models. The NG version sells for $24,590, while the Civic Si sells for $21,310, and the low-frills Civic costs only $15,010. According to emails with EIA staff, converting existing light duty vehicles to run on natural gas can cost anywhere from $6,000 to $20,000, while converting heavy trucks can cost between $20,000 and $50,000 per vehicle.

Relying on round numbers based on Wikipedia, for the present crude calculation we will conservatively assume that the Pickens Plan will require the conversion (or replacement with new models) of 235 million cars and light trucks to natural gas, at an average cost of $10,000 each. We conservatively assume the Pickens Plan also requires the conversion of 2 million heavy trucks at an average cost of $30,000 each. All told, we estimate that the upfront cost of converting the U.S. fleet to run on natural gas will cost at least $2.4 trillion.

Pickens’ own estimate for the wind portion of his plan is an upfront cost of $1.2 trillion, and above we conservatively estimate an upfront cost of $2.4 trillion to convert the fleet to run on natural gas. If we further assume a cost of $400 billion for other infrastructure changes, especially including the conversion of the nation’s 170,000 retail service stations to deliver natural gas–only 0.5% currently have this capability–then the total UPFRONT cost of the Pickens Plan is $4 trillion.

An Alternate Approach: Expansion of the SPR

Rather than a massive construction of wind farms, and a complete retooling of the transportation sector, there is a much simpler way to achieve the same reduction in vulnerability to another oil embargo: expansion of the SPR. To be fair to the Pickens Plan, we will assume a catastrophic scenario of an OPEC embargo that lasts for an entire year. (The 1973-74 OPEC embargo lasted only five months.)

Recall that the Pickens Plan, far from completely protecting the U.S. from such an embargo, would only mitigate its impact; the plan would only reduce U.S. imports by one-third. So, in order to match the effective protection offered by the Pickens Plan against our hypothetical embargo, the SPR would have to contain an additional four months’ worth of net oil imports. With that additional cushion of four months’ worth of imports in the SPR, if and when a year-long embargo struck, the U.S. could reduce its imports (at that time) by one-third, by drawing down on the SPR. Thus the U.S. would only have to import two-thirds of its normal volume of foreign oil during the year-long embargo, which is the exact same position the country would be in under the Pickens Plan.

How much would it cost to expand the SPR to contain an additional four months’ worth of net oil imports? We can get some back-of-the-envelope estimates by looking at the existing SPR, which has a capacity of 727 million barrels. Based on historical figures from this CATO Policy Analysis (pdf), this 727-million-barrel-capacity required construction costs (in 2008 dollars) of about $10.3 billion.

How much additional capacity would be required, in order to provide a four-month additional buffer, starting in ten years (when the Pickens Plan would be ready)? According to the EIA reference case in its Annual Energy Outlook 2008, total U.S. oil imports in the year 2020 will be some 11 million barrels per day, meaning the U.S. would need to boost the current SPR capacity by about 200 percent, in order to add an additional four months’ worth of imports by the year 2020. Based on the figure above, construction of this additional capacity would cost in the neighborhood of $21 billion.

We must also include the cost of filling the expanded SPR with the extra 1.32 billion barrels of crude (the four months’ of imports). Fortunately, the government would have ten years in which to fill the new SPR facilities–that is the time it takes to put the Pickens Plan in place. Presumably the U.S. government would notify major oil producers of its intentions to make massive purchases, and could wait several years for them to expand their pumping capacity. This would make the price spike (due to the new SPR purchases) lower than without such warning and lead time. Even so, the world price of oil would surely be higher because of the program. The EIA currently projects prices in the years 2015 – 2020 in the low $50s (in 2006 dollars), so for the sake of argument we will suppose that the SPR purchases would occur at an average price of $55 per barrel (in 2008 dollars). That works out to $73 billion for the crude going into the expanded SPR. However, prices will be higher for all imported crude during this period. If the fill occurs over a 3-year window, and keeps world oil prices $5 higher than they otherwise would have been, that is an additional $60 billion in U.S. expenditures on crude imports that could arguably be included as part of the upfront cost of the SPR plan.

Counting the $21 billion construction costs of the new storage facilities, the $73 billion to purchase four months’ worth of crude imports, and the $60 billion in higher import expenditures during the fill period, the total upfront cost of the SPR expansion plan is $154 billion, which is less than 4 percent of the upfront cost of the Pickens Plan.


The above estimates are obviously quite rough, but they show that the Pickens Plan–even on its own terms–is an incredibly expensive way to guard against the possibility of future oil disruptions. An alternative plan of expanding the SPR would cost about 4 percent of the Pickens Plan to achieve the same degree of protection. Moreover, much of these (far lower) costs of the SPR plan could be recovered, in the event that a catastrophic oil embargo did not occur, from selling off the stockpiled crude reserves. Finally, we have so far only considered the initial costs to get the two rival systems operational. The annual maintenance costs–for stockpiling an extra billion-plus barrels of crude, on the one hand, versus operating a huge wind and natural gas infrastructure spread throughout the country that is more costly than the system it would replace–would be far higher under the Pickens Plan.

There are potential benefits of the Pickens Plan that we have ignored. For example, Pickens’ ultimate dream of national “energy independence” would presumably be easier to achieve after the $1.2 trillion are spent on building a corridor of wind power. We do not claim that our rough analysis includes all such considerations. However, it is clear that supporters of the Pickens Plan must put out far more detailed studies than the vague proposals they have thus far released. It currently appears that the plan would be an incredible boondoggle and would waste trillions of dollars.

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