The True Costs Of Using Petroleum-Based Fuels
August 13, 2008
By Charles Cresson Wood
In business circles, the discussion about adopting alternative transportation fuels these days revolves largely around finances. While it is important to fully understand the finances of this new and rapidly evolving area, it is also important to understand the business interruption implications of continuing to rely on petroleum-based fuels. Yes, some alternative fuels do now provide lower per mile operational costs than petroleum-based fuels, but this benefit may very soon be completely overshadowed by the business interruption related losses suffered because deliveries cannot be made to customers, raw materials cannot be shipped from suppliers, salespeople cannot visit customers, etc. If you have not yet researched the geological data related to the peak oil discussion, I highly recommend two books: Richard Heinberg’s The Party’s Over and Matt Simmons’ Twilight In The Desert.
Most organizations have not yet seriously analyzed the downside financial risk of being unprepared for sky-high oil prices, let alone rationing and/or shortages. The fact that the price of crude oil went up 95% over the last year alone is a clarion call to pay attention to the fact that the world petroleum supply is no longer able to keep up with demand. The finances of the petroleum market are changing in a dramatic way, and organizations need to be doing the contingency planning, the operational conversions, and the financial analysis that goes along with these changes. While the operational costs for petroleum-based transportation fuels have been relatively stable for decades, we are entering a different period that will be characterized by profound volatility in the price of fuels. In addition, we are entering a period that will be marked by a profoundly eroded predictability of supply. Already we see truckers rioting in France, and other indications that the situation is changing rapidly, and many people are having trouble adjusting.
What would happen to your organization’s business model if gasoline was $10/gallon? This is not fantasy — this price for gasoline is already encountered every day by many people in Europe. What about $20/gallon? Are you seriously considering the way in which internal operations are soon going to be forced to change in order to accommodate the new high prices of petroleum-based fuels? For example, will some of the organization’s workers be forced to quit their jobs because they are no longer able to afford to commute from their homes in remotely located suburbs? Likewise, will the long-distance transportation of your organization’s goods soon be forced to move via boat or rail, rather than truck?
Far too many organizations are making strategic planning decisions and related future plans based on historical averages of the price of petroleum. This could prove to be a very serious error in the years ahead. Southwest Airlines was one of those organizations that saw the proverbial writing on the wall, and they took action to reflect what they saw. They entered long term hedging contracts to help assure a supply of jet fuel at current prices. Most other airlines did not take these same steps, and as a result, Southwest has enjoyed a much lower cost structure than its competitors did. As a result, Southwest went on to make significant profits while its competitors suffered significant losses. In the recent past, fuel ranked as the second largest operational cost for the major airlines, but data from the Energy Information Administration (EIA) indicates that fuel now ranks as the largest cost.
Where are petroleum-based fuels in your organization’s cost structure, and what specifically would happen if the costs for these fuels was to increase dramatically in the years ahead? Unfortunately, many organizations can’t accurately answer this question at this point in time. One recommended analysis, that will help management understand what could, and in many instances will happen, is to perform a petroleum dependency inventory. In such an inventory, analysts examine where and why an organization uses petroleum-based fuels such as gasoline and petro-diesel. The type of equipment consuming these fuels, the amount of fuels burned, the cost of these fuels, the location of the equipment consuming these fuels, the business processes served by that equipment, and related considerations are documented. Only when an organization truly understands how it is currently dependent on petroleum, will it be in grounded position to examine the pros and cons of the alternatives.
There are eleven commercially available alternative transportation fuels that organizations can move to, rather than continue to be precariously dependent on petroleum-based fuels. According to a three-year research study done by the Energy Management Institute, a number of these alternative fuels are now cost-competitive with traditional hydrocarbon-based fuels. Of particular note are electric vehicles, which can be fueled for less than $0.02/mile, when many the most efficient currently available petroleum-based vehicles are fueled for $0.16/mile. Of course, there is an up-front investment cost, and that is a deterrent for many decision-makers, especially in a slow economy. But when you see the big picture, you will appreciate that such an investment is not an optional choice, you will appreciate that you will be forced to move to alternative fuels – the only decision is now or later.
The new transportation fuel alternatives also provide a host of new benefits that are not available with petroleum-based fuels. For example, a firm using electric cars can manufacture its own fuel via solar panels, geothermal generating stations, or wind turbines. Likewise, biomass (municipal sludge, animal waste, forestry refuse, etc.) can be used to manufacture a variety of fuels such as bio-methane, the future’s renewable version of natural gas. Thus agricultural organizations that generate a good deal of waste could be recycling this same waste, making liquid motor fuels, and in many instances also generating electricity. One of the most attractive aspects of both electric vehicles and those that run on bio-methane, is not only that the fuels are renewable, but that they both already have a massive distribution system in place. For electricity it is the electric grid, and for bio-methane, it is the natural gas pipelines found in major metropolitan areas. Thus vehicles that use these alternative fuels don’t need to visit service stations to be refueled.
So consider that the petroleum situation may actually be much worse than you have heard. Consider that Americans are paying a whole lot more for their gasoline and diesel fuel than they now appreciate. The research of Milton Copulos, with the National Defense Council Foundation, is a real eye-opener. This research indicates that, when one factors in government subsidies to the oil industry, the war in Iraq to defend our oil supply, and related costs that consumers don’t directly pay at the pump, the actual cost of gasoline is $8/gallon. If one uses crude oil coming from the Middle East for this same analysis, the cost goes up to $11/gallon. And these costs are 2006 costs, so the current cost per gallon must be considerably higher than that. Reflecting this, Lester R. Brown of the Worldwatch Institute estimates the true cost of gasoline in America today is approximately $12/gallon. These economic realities underscore the urgent need to move decisively away from petroleum, and towards less expensive and less environmentally damaging alternative transportation fuels.
Charles Cresson Wood is an alternative fuels management consultant with Post-Petroleum Transportation, in Sausalito, California. His latest book is “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action.” You can contact him, and learn more about the book, via www.kickingthegasoline.com.