An Economist Looks at the E-Cat (Part Three): How Will the E-Cat Impact Oil Prices?

This is the third post in a series written by Paul Bennett, PhD candidate in economics at George Mason University.

What will the E-Cat’s impact be on the trajectory of the price of oil?

As discussed in previous posts, the price of oil is much higher than the extraction costs of the most easily extracted reserves. The owners of these reserves are taxing the oil and accumulating enormous wealth. It is interesting to speculate on what will happen to the price of oil over time.

Imagine that you are the king of Saudi Arabia. You own a large percentage of the world’s most easily extracted oil reserves. You have persuaded the OPEC nations that they should participate in a scheme to raise the price of oil at the rate that optimizes revenue for them and you by balancing the rate at which they allow oil to be delivered to the advanced economies with the need to avoid destroying economic growth. (In the 1970s, they got greedy and raised the price so rapidly that they caused a global recession.)

Part of the reason they can keep the price of oil high is the fear that we will run out of oil at some point in the future. To some extent, the price they can achieve is limited by the cost of extraction of reserves that are more difficult to extract. Deep sea drilling and oil shale deposits can be used as sources of oil, but the cost of extraction is much higher than for Saudi Arabian reserves. OPEC can drive prices up to maximize the net present value of their wealth, but only to the level at which oil companies can extract oil from the other sources profitably.

Now consider what happens when the E-Cat comes along. Suddenly the fear of running out of oil is gone. The fear of running out of nickel is many years, if not centuries, in the future. The king of Saudi Arabia and the rest of OPEC now have a very different maximization function. The expected market price of oil five years from now is certainly no more than the price that would make energy from oil the same price as energy from the E-Cat. I will call this the Oil-E-Cat equilibrium price for future reference. Suppose for the moment that even the most easily extracted oil cannot be extracted for this price. The king of Saudi Arabia is now faced with the reality that any oil not extracted within five years is going to be worth no more than the sands of his desert. He will certainly react by pumping a lot more oil and charging a lot less.

If he charges more than the Oil-E-Cat Equilibrium Price, he is just providing an incentive to the world to convert to E-Cats faster than they would otherwise. So I expect that he would lower the price to what he anticipates the Oil-E-Cat Equilibrium price to be. The result is that the energy price benefit expected from the E-Cat is achieved almost overnight! In short, I expect the price of oil to drop precipitously as soon as the oil market players understand the real potential of the E-Cat. Any of you gamblers out there, if you really believe that the E-Cat is as good as it looks, now is the time to sell oil futures short.

Paul Bennett

  • Al Dringenberg

    There are a number of possibilities for transportation and electrical generation which have been mentioned on various other sites but which have not been tied together.

    The e-cat produces heat in the 400-500C range which is just the right temperature for a very efficient Sterling engine. Sterling engines don’t have a lot of torque and are slow to get up to speed. However, once up to speed they could be used very nicely to drive a motor/generator or geared down ( think automatic transmission ) to drive a vehicle directly or in conjunction with a motor/generator. There are several sterling generating systems currently on the market which are used with solar arrays. With the e-cat, the sun doesn’t set in the evening. With one of the high capacity new batteries coming on stream, I think the e-cat could very quickly substitute for most fossil fuel applications.

    If the e-cat can produce 15-20 kw of heat, this would translate into 20 to 25 BHP at 100% efficiency. I’m not sure what the actual conversion efficiency of such a motor/ generator would be, but I remember the 16 HP Citroen 2CV putting France on wheels in the 1950s

    • mimarob

      Don’t think we need to go back to the deux-cheveaux (although it is a personal favourite of mine), super capacitors can buffer the very limited amount of energy required for acceleration, this is already in use in many modern vehicles such as in the start-stop technique. I wouldn’t expect too much of the first remade stirlings in efficiency, the 60% efficiency or so is only a theoretical maximum. Especially if heat input is cheap, car makers would probably use more steam to make the stirlings themselves cheaper (and less efficient).

  • Brad Arnold

    I am surprised that even the most rudimentary economic analysis of the introduction of the highly disruptive LENR Ni-H energy technology causes disagreement.

    Obviously, the E-Cat has a long way to go before it threatens to make oil as an energy source extinct. Furthermore, the reason it might have a more significant effect upon the price of oil is that our current financial markets are hypersensitive to trends and spikes/dips.

    In fact, I am pretty sure the E-Cat will at first only help boost oil consumption (!) because it will boost employment and cut energy costs, leading to a stronger economy and more oil consumption. Furthermore, it is predictable (as the article says) that oil prices will decline, further spurring demand.

    Obviously, the fossil fuel industry as we now know it will die when any energy technology (let alone a clean one) offers a 9/10th savings. By the way, this is a warning: if people start thinking that the E-Cat and LENR is bad for the economy, you could see a counter trend where stifling government regulations are popularly supported because of economic fears. Don’t underestimate the PR power of the oligarchy.

  • Luca Salvarani

    Important Correction:

    So the HIGH volume, AND EXPECIALLY PRICES, of short term contracts doens’t mean nothing at all for real economy corporations, manufacturers, suppliers and customers!

  • Luca Salvarani

    To John 1/2

    1) It’s much more complex than it appers! Let me use an example, without one it’s nearly impossibile to explain. If you are an electic utility that needs gas to produce energy …. you usually signs a contract according to you will receive a specific quantity of gas in 1 year (these contracts ineed usually have a duration of many years) and you will pay the gas according to the SPOT price that will be traded on future delivery date. If gas price will go down you will spend less and the opposite one if price will go up… To protect yourself you should buy a future gas contract with a duration of 1 year, so if gas price will go up you will pay more to the supplier but also earn on the future contract, so you are able to fix right now your future supply cost! and it’s very usefull expecially if you can’t change electric rates to your customers according to gas price fluctuations…. But there are many complications if you do it.. believe me on this! (for istance you need derivative experts, there’s a day by day mark to market so if gas price will go down, that usually would be a good news for you…. you must refinance your future contract margin call so you must always have enough liquidity to carry it on and so on..) ! So the electric company contacts an investment bank for the hedging! That bank has several options: for example could use a forward contract (very used! not regolated and non publicly discosed so your statistics don’t account for this), for example could do nearly nothing if it’s already bullish on gas price or should also hedge the gas company delivery (so it can earn hedging your position and also freely reduce its NET exposition to this risk: a duble gain..) or it can use a future contract: due to lack of liquidity and volumes on longer duration contracts that would turn the hedging more expensive it’s cheaper to pick a short term contract and before it will expire repeat the hegde with another short term contract as far as the effetive gas delivery: instead of buy 1 future contract with a 1 year duration…. the bank buys 1 contract with a 6 mouhts duration, and shortly before it terminates (to avoid phisical gas delivery and minimie the base risk in a “contango” situation) it will sell it closing your position, and then buy another 6 months future that terminates exactly 1 year from now…. So the low volume of short term contracts doens’t mean nothing at all for real economy corporations, manufacturers, suppliers and customers… for traders only it’s different! It’s like a mortgage with some low short term rates… it’s not very cheap if longer term rates are much more higher …. subprimes teach and nobody than you, as American, can easily undestand this! For futures you must use short term contracts, because they’re most effective, but you must also close and reopen your position, maybe several times! and so long term contracts price are very important anyway because “contango” or “backwardation” could greatly impact your FINAL NET gain or loss (indeed every time you close and reopen it you could lose or earn money: for istance you sell at 9 for close and buy at 10 for reopen… not exactly a bargain)! Sorry for this nearly biblical long example buy wihout it it would be very difficult to explain! Due to technical complexity and my poor english I hope you can undertand the most…
    Warm regars Luca Salvarani from Mantua.

    • John Dlouhy

      It is indeed more complex than it appears! I will defer to your superior education and experience in this subject. If you say that present prices can be strongly affected by supply-demand imbalances that are years away, I will consider it and try to learn more about this subject.

      Thank you for taking the time to explain to me.

  • Luca Salvarani

    To Cliff

    1)I understand your point of view about oil, meawhile about reach people I don’t understand at all: even rich people would buy an e-cat if it saves money … also a rich tries to become more richer… On the contrary rich people could afford capital expenses to buy and install e-cat more than other people… so they should be primary commercial targets along with large building and industrial plants.
    2)But for istance you should consider also this: oil is very precious due to transportation use and e-cat will not directly substitute it in this market.. but as a German as suggested on this blog I can use low cost and abundant energy to extract hydrongen from water and so thingswould change in the transportation market….. Another possibility (but i think it’s very unlikely and difficult) are electric cars…. Large e-cat clusters produce energy that through current grid fuel vehicles so bye oil…. it’s difficult but nobody can say it’s impossible!
    3) Don’t scold our doctor… he’s writing only a short speculative article and not an academic paper… and I agree with most things he has written … the most interesting one is that oil productors could will have an incentive to maximize output and so dropping oil price… just the opposite of now!

    • http://www.nickelpower.org Bruce Fast

      “e-cat will not directly substitute it in this market.” Au-contraire. If you check out this post, http://nickelpower.org/2011/04/18/return-of-the-steam-car/ you will see that cars, trucks, trains and ships are all relatively easy to convert to e-cats.

      • Luca Salvarani

        To Bruce

        I’ m meanly speaking about cars and trucks that represent the largely bigger oil transport application (very much more than trains and ships). Rossi has explaind in detail in a long italian-language video that this specific application presents many difficulties for an e-cat, and excideeing theese will be costly and takes a long time so he considers it a long shot….
        Due to my lack of thechnical know how I’m unable to fully understand and even translate you Rossi’s technical explanations. Sorry!
        Warm regards Luca Salvarani from Mantua

  • Cliff Bradley

    I’m fairly amazed after reading the three parts that Paul Bennett is only concerned with the cost of producing oil and the cost of the energy it can produce compared to the cost of an e-cat and the energy it can produce. This works well for the nuclear reactor problem but not for oil or coal.

    Oil is primarily used for various forms of energy, but it is also used to make plastic and all kinds of other goods. The e-cat only replaces part of this. So, there will continue to be a market for the lowest cost oil, albeit at a vastly reduced rate. Hooray!

    However, I can see that replacing electricity over time will follow several paths. First it will replace, over a few years, the coal, natural gas, fission, and oil burners that heat the water for conventional plants and use the steam generation capability. This stuff is already in place and the conversion would be relatively easy.

    Another path is that this is truly a game changing technology in that is can be made accessable to much smaller users. A small e-cat can be used to heat an apartment building, for example, and not produce electricity at all. A larger e-cat with a turbine generator can replace the electrical substations and so the huge electrical transmission lines go away.

    Another path is available to small steam turbine generators which people, who can afford them, can use for either remote areas or even to power their own house. Of course the waste heat can be used to heat water and the house.

    The point is that when you have game changing technology people will use it in different ways than the current infrastructure.

    My second point is that the good Doctor has not considered the affect it will have on the rich folks that own all that stuff the e-cat can replace. Rich folks tend to guard their stuff energetically and are not too scrupulous in how they go about it. Rossi can prove that his e-cat works, but you can bet that the lawyers and environmentalists and other wackos will be coming out of the woodwork like cockroaches to stall the adoption of his game changing technology. That may be why Rossi decided to self finance.

    Finally, consider what effect the e-cat will have when coupled with another game changer technology like Eestor’s new ultra-capacitor, or another brand. Think about having unlimited, cheap electricity coupled with a battery that can drive a car 300 miles at 70 miles per hour that can be charged in 5 minutes. Think of what that will do to gas stations. Electricity is not too valuable unless you have a way to store and concentrate and buffer it. A relatively small e-cat, for example, could drive a relatively large load if it ran continuously and was buffered by a large battery that could handle the spikes. This is the lesson of wind and solar power. It’s not economic if you can’t store it.

    Cliff Bradley

  • Luca Salvarani

    To John

    There will be so many things to speak about but there will be the proper occasions..
    Now I want to focus you only on few things:
    1) You consider the effective implementation of e-cat technology in the real world so you says that oil drop will be more slower… citing many convincig arguments. But you must consider the very different nature of financial markets! They react instanctly because investors revise their expectations really quickly so oil price traded on financial market (investors trade FUTURES contracts) will immediactly incorporate events that will occur only in the future… And if oil price drops significantly NOW that triggers an even quiker spread of e-cat technology… in a sort of self-substained way…
    2) Probably gas price will drop quicker than oil one because the prime application of e-cat is heat and because oil has also other important applications such as plastic materials…. A more probable chance is a financial crisis of western oil companies that currently extract gas and oil at a much more expensive price
    than Saudi Arabia… For them even a little price drop could trigger severe financial consequences that could be multiplied by no collateral capital fot these type of assets that investors consider safe heavens right now and by the leverage as I have previously explained.
    3) E-cat seems to me (I haven’t an advanced scientific background so I could be wrong) and also to other more prepared ones, an inizial hardware version that could become much more effective vith relatively low efforts. If Rossi properly understands the phicial process (and he states so) I think that a greater collaboration with scientific and accademic istitutions or other hardware corporations could even dramatically increase the energy efficiency and so the financial and real economy consequences could be much more quicker and wider than we now imagine.. Am I a dreamer or just an optimist?
    Bye Luca Salvarani from Mantua.

    • John Dlouhy

      1) The volume of futures contracts drops off to almost nothing for those dated 2 years in advance. Even contracts dated one year in advance have very small volume. http://futures.tradingcharts.com/marketquotes/index.php3?sectorname=oil As you can see by this chart, investors are not gambling very far in the future. Supply and demand are what determine price, in spite of the distortions of the futures markets.

      If in November a secret factory reveals it has 100 million E-Cats already built and ready to put in peoples homes then I would expect an immediate drop in gas prices as you say, and certainly some effect on oil prices because shipping and installation of these devices would be within the time frame of the bulk of written futures contracts.

      Your last point, that an oil price drop now would encourage E-Cat growth, is opposite to what I and Paul agree on. Could you elaborate, or did you mean to say the reverse?

      2) Half the houses are heated by natural gas and only 4% of oil is used for home heating so I agree that gas would be threatened first by an E-Cat heater.

      Concerning the financial crisis of oil companies, I value your opinion. Can you explain if the bonds sold by an energy company are valued based on its cash flow, or its verified reserves or maybe something else? I would think that knowing the end of oil is imminent, even with a longer time frame, could have some interesting immediate effects.

      3) Once an unquestionable proof of LENR is given, I believe the world wide rush to improve and capitalize on it will be historic.

  • John Dlouhy

    Paul, according to Rossi, initial cost of E-Cat energy will be about 1 cent per KWhr which makes a barrel of oil equivalent about $17. This is less than the lowest estimates I could find for Saudi’s cost of production so lowering the price of oil to disincentivize E-Cat adoption wouldn’t be possible. Even if this were not true, the ability of Saudi Arabia to significantly increase its pumping rate in order to drive down prices is put in doubt by a WikiLeaks cable covered in this news story last February http://www.guardian.co.uk/business/2011/feb/08/saudi-oil-reserves-overstated-wikileaks.

    In addition, at this point, the time frame for the adoption of the E-Cat is unknown and suggesting a given period like 5 years is necessarily a guess. I think the tendency is to underestimate adoption times. I base this on the experience of the internet’s adoption and the predictions about its various future effects. Many have come to pass or are happening now, but they took or will have taken one to two decades to materialize, not the few years originally thought. As well, using up existing investments such as cars and equipment that burn fuel will also slow down the adoption rate. Resistance to E-Cat adoption by the governments of oil exporting nations to protect their self interest should reasonably be expected too. For these reasons the adoption period is really quite uncertain, will likely take longer than expected, and makes assigning a net present value on that basis difficult.

    Markets can undergo wild deviations based on investor sentiment in the short term, but in the long term they tend to follow the fundamentals. I believe the oil price will drop, but given the size of the industry, the entrenchment of existing fuel using equipment, the inertia of the public to change, and the real issues involved in growing the E-Cat industry, I don’t expect the price to fall as quickly as you suggest. Hopefully it will decline gradually over many years and avoid economic turmoil.

    • Paul

      “suggesting a given period like 5 years is necessarily a guess. I think the tendency is to underestimate adoption times. I base this on the experience of the internet’s adoption”

      I think the comparison is misleading. The Internet was a new technology, but nobody knew how to use it, or what to use it for. It took a while to reach it’s potential (probably not even yet) because people had to find ways to use it. For the E-Cat, the use of it is immediately obvious. You replace your heaters first and as soon as cost effective electricity generators are available, you plug it into your house’s electrical supply and disconnect the mains. I foresee two phases (1) direct replacement in existing uses of heat and electricity, and (2) new uses that will be invented because power is now so cheap. I think phase 1 will happen very quickly, but the speed depends on the cost differential between existing power systems and the E-Cat ones. In a previous article, I compared the E-Cat to the replacement of canals by railways in England in the 1830s. In spite of the enormous engineering feat that this represented to the technology of the time, it was effectively completed in 20 years. With today’s technologies, a similarly cost advantaged transition with a much less challenging technological change could easily happen in 5 years.

      “Even if this were not true, the ability of Saudi Arabia to significantly increase its pumping rate in order to drive down prices is put in doubt . . .”

      I do not think that Saudi Arabia will need to increase its pumping rate. The reason the price is so high today is that Saudi Arabia can “see” a future in which demand for oil rises and rises. They therefore have no incentive to price their oil competitively. They can do net present value calculations on their oil reserves at various prices and extraction rates and optimize their wealth over whatever time horizon they like best.

      Faced with the certainty of a reducing demand, these calculations will look very different. They may not be able to pump any more, but their OPEC colleagues almost certainly can and new reserves are being discovered all the time. The price will come down to the point where the amount supplied equals the amount demanded at that price. That price will be the extraction cost of the highest cost producer needed to meet the level of demand. (sorry that’s getting a bit complicated.)
      Saudi Arabia will still be raking it in if the demand cannot be met by suppliers that can extract oil at the same price as they can, but the price will come down and the OPEC cartel will fail. They will all be pumping it as fast as they can to get as much money as they can before it dries up. Only if it is true that all of the low extraction cost producers are unable to meet demand will they be able to maintain the price. I am convinced that the main producers are conserving their reserves to some extent and so the price will come down. But if it does not, it will only accelerate the introduction of the E-Cat and as demand comes down, the price will drop.