Tuesday, August 5, 2008

Part III: Why Exploit Our Domestic Oil Resources

How does $300 a barrel oil in a decade strike you? That is the prediction of T. Boone Pickens, the billionaire octogenarian oil man, unless things change. His prior prognostications on the oil market have proven accurate over the years.

It does not take a PhD in economics to recognize that supply and demand is at the heart of the rising cost of oil – although if you wish to rely on an economist Thomas Sowell would be a good one to consult. [As an aside, the exchange rate of the dollar adds between 15% to 20% to the cost of a barrel of oil today over the exchange rate in 2000, but that is beyond the scope of this post.]. Because supply has stagnated while demand has risen, we are getting hit from two sides. One, the base price of oil is going to continuously rise with rising demand. Further, demand looks to trend ever upward for the forseeable future. Two, because the market is tight with demand at or exceeding supply, it will remain volatile, subject to high fluctuations, if there is any significant threat to supply, whether it be a threat from God, Gaia or man.

Note: This is the third in a series of posts looking at our energy alternatives.

Part I – The Economics of Alternative Energy - an examination of the viability and cost effectiveness of wind, solar, geo-thermal, bio-mass, bio-fuel, and nuclear.

Part II - Oil & The Hostile Domestic Regulatory Environment - a look at the regulatory scheme put in place since 1970 that prohibits or otherwise limits our ability to exploit our domestic oil and natural gas.

As to demand, it has exploded. The rise in demand has varied from country to country, but worldwide it increased 15% in the 1990’s and has already increased 10% from 2000 to 2005. Much of that comes from China which is now importing about 4 million barrels of oil per day. That is 60% of its oil supplies and over four times the oil it was importing just 8 years ago. India’s figures, though lower, are growing at a similar percentage rate. And these economies are just starting to expand. World wide demand is going to grow.

Supply was able to roughly match demand through 2004. World oil production stagnated in 2005 and has not kept pace with this explosion in demand since. Thus, we get what some cynically call the Pelosi premium as markets adjusted post-2005 to the new supply and demand equation:
(From Freep via Gateway Pundit)

New sources of oil need to be found, but as the major oil fields play out, these are expected to be more expensive to exploit. That said, they do exist to be exploited, particularly in the U.S. where we are sitting on possibly trillions of barrels of reserves between ANWR, coastal sites and oil shale.

So what is our supply and what effect would that have on demand and the price of gas at the pump?

Estimates of recoverable oil from our domestic resources currently off-limits to exploration or drilling include the following:

Oil Shale – 800,000,000,000 – 2,000,000,000,000 barrels of oil

Continental Shelf (East & West Coast) – 115,000,000,000 barrels of oil

ANWR – 10,000,000,000 barrels of oil

How fast any of these assets could be brought on line is an issue. In some places, such as off the coast of California where drilling was halted three decades ago but some of the rigging is still in place, I have seen an estimate of one year though I can’t find the link now. As to ANWR, given that the drilling site has already been fully explored, most estimates show production becoming available in one to three years from start of drilling. The estimates of yield are 1,000,000 barrels of oil per day. As to the others, there still has to be exploration and ten years is probably a reasonable estimate. All of this assumes that drilling, even if approved, is not sidetracked by over-regulation and by private lawsuits brought under the EPA and ESA - all of which is discussed in Part II, above.

What would this increase in supply mean to oil and gas prices?

Using Republican figures, this would at least bring the cost of gas down to about $2.00 per gallon. Here was the basis for their assessment.

Here is the explanation of the above chart from Congressman Roy Blunt:

Explanation: Methodology: Retail gasoline prices are the result of literally hundreds of factors including crude oil supply, global demand, refinery capacity, regulation, taxes, weather, the value of the dollar, etc. Therefore it is impossible to say with certainty what one individual action will do to the overall price. However, based on what we know about the impact of crude oil supply and prices it is possible to develop some potential ranges of impact on gasoline prices for certain policy changes. For example, using the methodology employed by Speaker Pelosi and House Democrats that suspending shipments into the Strategic Petroleum Reserve (between 40-77,000 barrels of oil a day) would reduce gas prices by at least 5 cents, bringing ANWR online (at least one million barrels of oil a day) could impact gasoline prices by between 70 cents and $1.60.

On the Democratic side, there are two sets of figures to look at. The first comes from Charles Schumer. On the floor of the Senate, he stated a month ago that an increase in world supply of 1,000,000 barrels per day would immediately drop the price of oil by fifty cents. That was part of his call to somehow force Saudi Arabia to begin pumping an extra million barrels of oil per day. The second set of figures also comes from Senator Shumer. Apparently it is only if that oil is produced in Saudi Arabia would it impact the price of gas under the well worn rules of supply and demand. A million barrels of additional production from domestic sources would, according to Senator Schumer and essentially all of his Democratic colleagues, have nominal, if any impact on gas prices.

Someone is being less than honest with America. And given that two thirds of voters now favor expanded domestic drilling, I’d say the jury has reached a verdict on who is telling the truth.

Eventually, and the sooner the better, we need to move off of oil. The writing is on the wall, and unlike the 70’s and 80’s when the impetus to find cost effective alternative energy was overcome by the Saudis flooding the markets with cheap oil, I can’t see this one going away. The Saudis are producing near capacity already and demand is going to continue to rise. Even fully exploiting our own resources is only going to buy us time to develop alternatives. But, as I explained in detail in Part I linked above, alternative energy simply is not yet developed to the point that they can be substituted for oil and gas. Thus, not exploiting our oil resources in the absence of viable and cost effective alternatives is a recipe for economic disaster. While Obama may welcome high gas prices, Middle America is just beginning to suffer and our economic figures will eventually begin to show the pain.


Brian H said...

The Bakken field has been opening up, and, according to some, the new drilling technique of horizontal drilling through the shale, combined with tech for shattering the shale and releasing the oil, is generating output of light, sweet, crude, superior to that produced by Saudia Arabia, at $16/bbl. This could release about ½trillion bbl onto the market.

So some rethinking may have to be done.

Jimmy J. said...

This is a letter I sent to my Congress critters in Washington State. It outlines an organized way to attack our energy problems. I'm sure my ideas could be improved on by experts in the various fields. I'm just a citizen who has done some reading about the issues. But it beats the sloganeering that I see coming from the political class. The real upside is that 50 years from now we could be emitting a lot less CO2 (although I don't see CO2 as a major problem.) and be much more energy efficient and secure.

Dear Congress Critter,

I am writing to you about the energy problem this country faces because I believe the problem is entirely self inflicted. I also believe that wrong-headed Congressional policy has played a large part in this issue.

So, I'm writing to make some suggestions that I think could help you as we work to solve this problem. These come from just an average citizen who has tried to inform himself about the issues. If much smarter people than I got to work on them they might have even better ideas. The government has access to smart people. I hope you will use them.

As I see it the problem can be broken down into three areas. The first and most immediate is providing fuel for transportation in this country. Without adequate supplies of fuel (gasoline, diesel, ethanol, biodiesel, jet fuel), prices will increase to the point where our economy and even our military will be crippled and produce far below their potential. A crippled economy provides less of everything that allows Americans to enjoy their present high standard of living.

The transportation problem can be broken down into three divisions, Immediate action (now to 3 years), Intermediate action (3years - 10 years), and long term (10 years - 50 years).

What can be done immediately (now to 3 years) to help alleviate soaring fuel prices?
1. Investigate the oil commodities market to see if, in fact, there is any chicanery going on there. There are rumors of this. It seems that steps should be taken to dispel the rumors or verify them. If there is chicanery and oil prices are artificially inflated, steps can be taken to stop the chicanery. This would reduce prices immediately.
2. Announce that the Federal Government will release 1/3 of the strategic oil reserve in daily amounts that would tilt the supply demand equation slightly into surplus supply.
3. Eliminate the tariff on Brazilian ethanol. This would bring much more ethanol into the system at reasonable prices. In addition, pass legislation requiring all autos in this country to have flex fuel engines. (Cost - about $100/car.)
4. Authorize new refinery capacity or additional capacity for old refineries bypassing the onerous permitting and environmental roadblocks to such action. The refinery capacity in this country needs to be increased by at least 20% as quickly as possible.
5. Implement a policy of aggressive exploration for oil in this country.This would mean opening up for drilling the Intercontinental shelf areas off both coasts and the eastern Gulf of Mexico. Enact strict measures to make the drilling and production facilities environmentally safe. Open up not only ANWR, but also the Naval Petroleum Reserve that is west of Prudhoe Bay in northern Alaska.
6. Allow large pilot programs for developing our oil shale reserves in the Green River Shale of Colorado, Utah, and Wyoming. Encourage development of coal to liquid projects near large coal deposits. These coal based liquids can provide fuel for diesel trucks and jet engines, two of our biggest users of transportation fuels.
7. Encourage telecommuting, 4 day (10 hour/day) work weeks, video-conferencing, and other such fuel saving ideas that can save workers both money and fuel. A lot seems to be happening here already.
8. Brazil has just found two huge oil fields in their offshore area. Now would be a good time to provide expertise and incentives to get that oil in the pipeline with the U. S. as a major customer.

What can be done in the intermediate term. (3 - 10 years.)?
1. It takes about ten years for the truck and auto fleet in this country to become more efficient overall. Give tax incentives to people to buy more fuel efficient cars during this entire period.
2. Push forward aggressively in reforming the Air Traffic Control System in the U.S. This neanderthal, inefficient system costs the airlines and their passengers much wasted fuel and time every day. Consider privatizing the Air Traffic Control System to accomplish the goal.
3. Give the auto makers incentives to produce more fuel efficient cars. High mpg diesel engines may well be the way forward over the intermediate term. The technology is available, easy to implement, and cheaper than hybrids or all electric cars.
4. This is when opening up the offshore and Alaskan areas will begin to pay off. Oil from that exploration and drilling will come to market allowing us to import much less oil.
5. The work started on ethanol and bio-diesel 3 years ago will start paying off.

What can be done in the long term (10 - 50 years.)
1. Provide incentives for research on clean new fuels for transportation. Electric and hydrogen power now seem to be the leaders, but they must first be made practical and available at a price that won't destroy the economy. Any such new mode of transportation power would take 25 - 50 years to implement, so it is for the long term.
2. It is at this point that our efforts to utilize coal-liquids and oil shale will come to fruition. While the U.S. will be shifting to other energy for transportation, many nations will still be dependent on oil based products. We could then become an exporter of petroleum.
3. We mustn't lose sight of the fact that we will continue to need oil/petroleum based products to produce plastics, medicines, fertilizer, and fabrics. We also must recognize that fuel for our aircraft will be petroleum based much longer than for trucks/autos.

The second part of our energy problem relates to the energy to provide plentiful supplies of electricity. At present our electricity is produced by hydro-electric power, coal-fired plants, natural gas fired plants, nuclear plants, wind generators, tidal generators, solar panel arrays, and geothermal heat. It is estimated that we will need to double our electric generating capacity in the next fifty years. Maybe more than that if electric cars become practical.

1. We are going full speed ahead on solar, tidal, wind, and geothermal. Unfortunately, at best those sources probably will not produce more than 20% of our total electricity needs unless we can find some efficient way to store energy to cover the gaps in wind and solar generation. Natural gas is limited and is more valuable at present as a source for heating buildings. Coal produces most of our electricity, but is dirty. The one alternative that is clean and abundant is nuclear. This country needs to get cracking on building nuclear power plants now. They take time to build and we will need a lot of them over the next 50 years. The U.S. Navy has been using nuclear power in their ships for 50 years with no major accidents. The new pebble bed nuclear units are simpler, safer, and more efficient than old technology.
2. There are still many places in the U.S. where small hydro-electric plants could be installed. The Swiss have put in small plants all over their country. Wherever there is water running downhill, hydroelectric can be made to work. This should be encouraged. Once a plant is built the cost to produce clean electricity is quite small.
3. There may be other clean energy sources for electricity and research for those new sources should be ongoing.

The third part of the energy equation relates to heating our buildings. Much has already been done in this area. Improved building codes, better windows, tighter sealing, heavier insulation, more efficient furnaces and water heaters are all part of the mix. We have come a long way in conservation, but there is still more that can be done. However, sealing up houses too tightly is unhealthy for the occupants. So there is an upper limit to gains in that area. In the Northeast many houses are still heated with heating oil. Natural gas is presently cleaner and more efficient for home heating. Oil heat should be phased out and replaced by natural gas wherever possible. It seems to me that geo-thermal heat pumps are the building heating systems of the future. (5 - 50 years) They are much, much more efficient than a regular heat pump. Work needs to be done to make them easier and less disruptive to install (their coils have to be below ground or underwater) as well as priced comparably to a natural gas furnace (Presently about 2-3 times as expensive).

I hope you will look at these ideas and realize that our present problem is the result of not utilizing the resources we have here in this country while relying on buying them from other countries, some of whom do not have our best interests at heart. We are facing PEAK OIL at some point in the not too distant future. Taking action now can lead to a more secure, prosperous, and peaceful future.

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