Energy and Food Trade-offs

As an energy and mineral economist and equity analyst, I find that we, as Americans, have become the most hypocritical people on earth.  We want cheap energy and cheap food and to feed the world.  While all outcomes are desirable, they may not be readily attainable due to costs, supply or demand.  I am not implying that we should not attempt to do all of these things simultaneously, what I am saying is that all of the outcomes may not be possible with a given budget, be it, local, state or federal.  There will be trade-offs.

One such set of trade-offs is shipping Bakken and Canadian oil and/or Midwest grain over the same railroad tracks.  With only three economically viable transportation methods – rail for oil and grain (long haul), pipeline for oil (long haul), or truck for oil and grain (short haul); most of the oil in the US has been shipped by pipeline and most of the grain has been shipped by rail.  Until recently, these two modes have been the most efficient transportation methods.  Despite their efficiency though, there is not enough capacity of either to transport surpluses.  Right now we have surpluses in oil production and grain production.  Trade-offs need to be made. 

The media has reported extensively about railroad transportation, pipeline transportation, horizontal hydro fracturing and agribusiness.  Several technologies have created the perfect storm for efficient production.  However, transportation infrastructure is woefully behind.  Let’s address the issues.  The combination of horizontal drilling and hydro fracturing has significantly increased the productive capabilities of well bores.  When I drilled oil wells, they were vertical and depending upon the porosity, effective porosity, permeability and pressure of the formation, a single well bore in the Williston Basin (located in the states of Montana, North Dakota and the province of Alberta) could drain, on average, 160 acres.  With the advent of horizontal hydro fracturing, a single well bore, ceteris paribus, can now drain more than 640 acres.  This technology resulted in at least three fewer wells of being drilled (thus lower overall costs), resulting in less surface area disturbance – a huge benefit.  With the number of vertical wells falling and horizontal wells increasing and the number of stages (horizontal section lengths) increasing; oil and gas production has increased.  Production from the North Dakota’s/Montana’s Williston Basin and Alberta’s Williston Basin and their Athabasca oil sands has increased so much that it exceeds pipeline capacities.  Hence, the oil and gas companies had to find other modes of transportation – railroads. 

Traditionally, most if not all, grains have been shipped by rail.  But three years ago, we had a drought in the Midwest and capacity on the unit trains (100-110 cars per train) became available for oil companies.  The rail companies scoured the US for oil tank cars and moved them up north.  This was partially made possible by an increase in capacity and bidirectional capability of the Henry Hub storage and pipeline terminus.

Over the past 15 years, farmers have been able to significantly increase crop yields through two technologies that took off in the last 10 years – global positioning systems (GPS) and genetic modification (GM).  The sophistication of GPS systems allowed the farmer to leave less uncultivated land behind through precision farming.  When other new technologies were added like moisture and chemical sensors, seed counters and planters, etc., the farmer could tailor the planting, watering, insecticide and pesticide applications.  This increased the yield per acre and reduced the overspray of the chemicals.  A win-win.  A coincidental technological explosion took place in seed germination.  Several biotechnology companies developed GM techniques, which expedited the traditional plant grafting techniques.  They incorporated pesticide and insecticide traits and drought resistance traits (more recent).  The advent of these technologies allowed the farmer to crank up the yields.  Thus, the government was able to encourage corn ethanol production (though this is being challenged for energy efficiency issues and food for fuel issues).   With the last two years having above average moisture, yields have increased significantly off the bottom of three years ago, reversing the shortage to a surplus.  Now, the farmers have to decide to cut back on production for next season or build storage – trade-offs.

Here we are then, at crossroads (literally and figuratively).  We, Americans, on the one hand do not want to build new pipelines to carry this increased oil, which has dropped the pump price and reduced dependency on the Mideast (though horizontal hydro fracturing will not make us energy independent – that is another discussion for another day).  That decision would have freed up the rail cars to carry grain from fields to export for the hungry.  Instead we opted for stalling on the pipeline construction, which resulted in numerous oil tank car rail accidents (and forty-two confirmed deaths and five missing and presumed dead in the Lac-Megantic, Quebec oil car derailment) over the past 18 months and grain piling up in silos with no place to go.  This has resulted in corn prices plummeting and putting farmers back into financial distress.

The politics of all of this have been brewing in Minnesota for the past 12 months or so.  A recent study shows that Minnesota grain farmers lost $109 million in revenue from March through May in 2014 alone, while ethanol producers have profited from the cheap corn prices.  Pipelines are still the most efficient and cost effective modes of transportation for oil.  While trains are the most efficient and cost effective modes of transportation for grain.  Let’s drop the hypocrisy and get back to providing good paying jobs, renewing and rebuilding our aging infrastructure and getting the commodities to market.