Energy prices have fallen considerably during the last year. Today, crude oil is hovering around $50 a barrel, down significantly from last year’s price of $110. As a result of the price drop, U.S. consumers are enjoying cheaper gas and lower electricity and home heating bills, which have been good overall for most segments of the economy. It has not been good for domestic oil production, however, which is now in a rapid decline.

According to a recent Wall Street Journal article, the average break-even price for crude oil production in North Dakota is around $35 a barrel, but approximately 15% of that available oil has a break-even production price of $87 a barrel. The national average cost of production for shale oil is around $75 a barrel, with a range of just below $30 to over $110. When the barrel price falls below the break-even production cost, you stop producing, which is exactly what is starting to happen in North Dakota and elsewhere.

$200 a barrel? Doubtful

When production goes down, supply goes down and the price will increase. In fact, OPEC’s Secretary-General Abdulla al-Badri is projecting that oil will, at some undetermined point in time, reach $200 a barrel. I don’t buy that, but during the recent price plunge, OPEC has refused to cut its oil production knowing that the low market prices for oil will drive out more costly U.S. domestic oil production from shale fields and elsewhere. Then, with a long lag period for production to resume, OPEC will clean up, with a higher market share and higher prices for a period of time.

As I said, I suspect that the days of $200 a barrel for crude are a long way off, if they ever reach that high, but one thing is fairly certain: the low prices we are experiencing now are not likely to last for an extended period of time. Experts predict a modest rise over the next year, with prices reaching $65 to $75 a barrel. I also suspect that oil prices will, by 2025, stabilize around $90 to $100 a barrel, which because of the lag in restarting production sometime after a higher peak in prices, means OPEC gets to have their fun for a period of time. Given that energy prices are destined to rise, we should try to outplay OPEC and manage our future by managing our energy.

Home-grown alternatives to oil

One way to manage our energy is to create our own. Anaerobic digesters are one way, but solar, wind and geothermal are also options. These technologies push down demand for oil, which helps reduce prices for oil and anything that depends on oil for production. That isn’t to say everyone should run out and invest in these technologies, because they don’t make economic sense across the board. There are, however, pockets around the country where they do pencil out.

California is a great example. Right now they are implementing Senate Bill 1122 which provides a 90-megawatt carve-out for renewable energy from dairy and agriculture. That power purchase agreement rate was 12.77 cents per kilowatt-hour initially, but it has risen now to over 14 cents. Conventional wisdom generally indicates that a dairy anaerobic digester is profitable with a power purchase agreement minimum of 9 or 10 cents a kilowatt-hour. With a number of dairy digesters operating with 1 megawatt gensets, the carveout would make 90 new anaerobic digesters work. Obviously, if each were creating 2 megawatts, that number would drop to 45 systems. Either way, the numbers are good.

If digesters don’t work for you (and they don’t pan out economically in many areas), solar might. Solar City, the No. 1 supplier of solar installations, has a very lucrative business in well over a dozen states. In its business model, the host uses the solar to create its own electric power but does not create any excess to sell back to the grid.

Solar for power, hot water

Solar used in this manner can work out nicely in locations where power prices are high. Solar also works well on dairy processing facilities and dairy farms. I know of one farmer who is considering a 600+ kilowatt system that will pay for itself in five years. Over its 30-year life, the system will save the farmer $5 million. In addition to photovoltaic systems, solar can be a great option for hot water. There are a number of vendors that can make it happen, as well as a number of state and federal governmental programs that help drive the economics of these technologies.

In addition to digesters and solar, dairy farms are installing or currently using small wind turbines. The typical size is around 100 kilowatts, though larger systems are possible. Like solar, this technology can be used at dairy processing and dairy farming operations. The Department of Energy estimates that over the next two decades we could get as much as 20% of our power from wind energy.

 Alternative energy from digesters, solar, wind and other technologies is domestic energy, and can help lower our dependence on foreign energy. In addition, it helps stabilize the price of oil, gas and electricity to ensure that we are managing our energy and not being managed by sources outside our borders. In addition to that, we get a bonus with the greenhouse gas reductions that are concomitant with these technologies. So where it makes economic sense, it’s a big win-win.