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.
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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.