Alternative Energy, Energy Independence and Global Warming Reduction

And What About ANWR? The Economics Have Changed

We take a fresh look at the question in this story (righthand column). Does its greater potential outweigh concerns for the environment?

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getting past the hyperventilation
So, Should We Drill Offshore? Good Idea or Bad?

Artfully seizing on $4-plus gasoline as the ascendant issue for voters, Senator John McCain stirred up a squall when he proposed lifting the ban on offshore drilling two weeks ago, which he said would "be very helpful in the short term resolving our energy crisis".

President Bush immediately signed on. He wants to compel Congress to overturn a ban that has been law for 25 years. "If Congressional leaders leave for the Fourth of July recess without taking action, they will need to explain why $4-a-gallon gasoline is not enough incentive for them to act," he said in the White House Rose Garden. "And Americans will rightly ask how high…gas prices have to rise before the Democratic-controlled Congress will do something."

That McCain and Bush sought to create the impression that revocation of the drilling ban will have anything to do with today's gasoline price was seen as an election tactic that had Democrats steamed. What's more, Congress is desperate to appear to be taking action in an election year, holding hearings and cranking out bills tailored to the public ignorance of the oil market. Our legislators — Senator Obama among them — want us to believe that penalizing the oil majors with a "windfall" profits tax, or legislation to curtail speculation, is the answer to high gasoline prices.

Time to see if we can sort out the confusion — the conflicting arguments, the twisted facts, the political demagoguery — to see whether or not offshore drilling makes sense.
Why Is the Price of Oil So High? Speculators of course have an effect on prices, but there seems to be universal agreement that there is no way of knowing just how much. One theory says speculation represents a flight from the declining dollar and resulting inflation (it is not for nothing that oil is called "black gold"). Arguing that speculators are the cause is an attempt to shift blame. Speculators don't create an alternate universe; they place their bets on what they think will be the future reality. Whatever effect they have is small compared to real world supply/demand balance.

In blaming Democrats in Congress for inaction, the Administration wants to mask the fact that much of the oil price run up owes to the nearly 40% decline in the dollar's value against other major currencies during Bush's years in office. Many factors, including a near doubling of our national debt, contribute to this weakness. This means that one needs a great many more dollars to buy a barrel of oil — or a tank of gas.

But the essential problem is that worldwide growth in demand is approaching the producing countries' ability to supply it, a disequilibrium likely to worsen. Excess capacity has plunged from 5 million barrels a day to in 2002 to 2 million now. It is uncertain by just how much the Saudis – who are thought to be the only oil exporters capable of increasing production quickly, but who are notoriously secretive about their pumping capacity — could ramp up production to keep pace with demand.

Moreover, tight supplies are exacerbated by a patchwork of troubles: Militant gangs have reduced Nigeria's production by 1 million barrels a day; Russian output has plateaued; Mexico's political inaction has allowed its state-owned oil industry to decline. Speculators factor in these realities.

Once current oil prices — $144 a barrel at this writing — move through the pipeline to gas stations, experts say you can expect to pay $5.00 a gallon.
Where Things Stand Drilling was banned along all of America's coastlines other than a 15% stretch along the Gulf of Mexico by a law signed 27 years ago by President Reagan. Senator McCain and President Bush want the ban lifted for the Outer Continental Shelf, a legal not a topological band of ocean floor that wraps the U.S. between 3 and 200 miles.

Those opposed to the proposition argue that the oil companies already hold 68 million acres of federal lands that go unexplored, and that only 10.5 million acres of the 44 million leased offshore have been put to use. A bill in the House would require the companies to use them or lose them. Senator Obama suggests levying a surcharge for every leased acre that has not been put to the drill bit. David O'Reilly, chairman and CEO of Chevron, asks in a New York Times interview that legislators learn the facts, that geological exploration must precede drilling, that it takes time, that seismic testing will find nothing on much of that acreage.

Nevertheless, the oil majors have much that is untapped. Why do they need more? Skeptics believe that, as two oilmen, Bush and Cheney want to see the oil companies warehouse as much acreage as possible. On the other hand, it is clear that both Democrats and Republicans at the State and Federal level have blocked off-shore production of proven reserves to such an extent that U.S. oil giants have had to explore in places like Angola rather than produce proven reserves right here is this country.
Lifting the Ban: A Quick Fix? Hardly. A 2007 analysis by the Energy Information Administration concluded that opening drilling on the continental shelf "would not have a significant impact on domestic crude oil and natural gas production or prices before 2030."

Confronted with this timeline, McCain nevertheless said that rescinding the ban "would have psychological impact that I think is beneficial". This drew derision from Senator Obama, who called McCain's admission "Washington speak for 'It polls well'". But other commentators, who know how markets work, believe that the prospect of more supply in the future affects expectations of market participants and plays a major role in pricing.

Beyond the complexity of analyzing millions of square miles of deep sea for where best to drill, and the logistics of preparation, even that lengthy timeline probably does not factor in a worldwide shortage of drilling ships. The New York Times brought that starkly to light when it reported that "over three-quarters of the drill-ships currently under construction have already been contracted to oil companies eager to benefit from triple-digit oil prices". Each larger than a World War II aircraft carrier, eight of the nine deepwater rigs under construction at the world's largest builder are already under contract for periods ranging from four to seven years once they leave the shipyards in 2009 and 2010. Adding to the problem, the article cites shortages of steel, engineering and manufacturing capacity.
So, Should We Drill? There's nothing like a hole in the wallet to cause the public to abandon lofty environmental ideals. A Gallup poll in May found that 57% of Americans surveyed are in favor of drilling for oil in offshore and in wilderness areas now off limits.

Although the pretext for bringing up the subject may have played to voter misconceptions — that drilling offshore would quickly affect today's gas prices -- it does raise the question of whether we should do something different with our offshore properties, and to review what good might come from any such action.
Will it be our oil? If we boost production in the U.S., so goes the argument, we will send fewer dollars to the petro-states. Is this true? Ed Markey (D-MA) claimed a bill he introduced in 2007 would "back out every drop of oil we currently import from the Persian Gulf". Newt Gingrich has spoken of "a strategic energy policy which is explicitly aimed at making the Persian Gulf and the dictatorships less wealthy".

Those claims are hogwash. It's a world market with a global price set daily. The oil companies that drill offshore (or in ANWR) will sell to the highest bidder, a trader in London or Rotterdam, for example, for delivery to China, say. Users purchase oil according to its grade and without regard to country of origin. Many do not know that the U.S., despite high gasoline prices, right now exports 1.4 million barrels a day.

Moreover, the huge cost of deep sea drilling leads to collaboration. Jack 2, an elephant 270 miles southwest of New Orleans that may yield 15 billion barrels, was drilled by a consortium of Chevron, Devon Energy and Norway's Statoil ASA. The rock formation is under 7,000 feet of water and 20,000 feet of earth mantle — a record — and cost $100 million to bring in. We cannot expect any such consortium, or other oil companies, to give America a sympathy discount. But the impression that we are sitting on our reserves while we drain those of other countries is an argument than many feel has merit.

However, the more we produce in this country, either for export or for home use, the better for world supply/demand balance and for our balance of payments. And therefore for prices.
Would Prices Fall? Newsweek economics columnist Robert Samuelson says "no, we can't drill our way" out of the problem, but, like an economist, he also says that "producers would have less power to exact ever-higher prices, because there would be more competition among them to sell".

That fails to recognize that demand is forecast to rise faster than new production can come on stream, driving prices ever higher. New Energy Department forecasts see world oil demand growing 40% by 2030, including a 28% increase in the U.S.

It is also true that only a quarter of the oil industry is not state controlled, and half of the rest is a cartel. Other factors threaten to drive oil prices higher: the need to explore in increasingly hostile climes, for oil that is more viscous, sulfurous and expensive to refine, and that require drilling ships that run to $500 million a copy -– if you can find one.
How Much Oil Is There? No one knows for sure how much oil lies off America's coastlines. Only in the Gulf has there been much exploration. The Minerals Management Service, the office charged with estimating the assets of the federal domain, figures there to be 17.8 billion barrels under the restricted waters (and 76.5 trillion cubic feet of natural gas). Here's a quick rundown, with figures in billions of barrels:

Atlantic 3.8 Gulf of Mexico 3.7
Southern California 5.6 Central California 2.3
Northern California 2.1 Washington-Oregon .4

That comes to about 24% of the 75 billion barrels that the Energy Information Administration estimates for all federal properties currently off-limits for development.

The 15% of the continental shelf where drilling is permitted is in the Gulf of Mexico, yielding about 27% percent of U.S. oil production, which itself is less than 40% of U.S. consumption – 21.3 million barrels daily at its peak this past January. Oil companies are particularly interested in seeing the eastern Gulf opened to exploration because it is shallow and therefore easier to drill. The National Petroleum Council estimates that the zone could have 5.2 billion barrels of oil (and 36.7 trillion cubic feet of natural gas), quite a bit more than the government tally.

But all such estimates are speculative, and disinformation abounds. Amplifying President Bush's call for immediate Congressional action, Newt Gingrich says in a video on the Internet, "The Brazilians just discovered two huge reserves in the Atlantic ocean. These are so large that the Brazilian's went from estimated reserves of 10 billion barrels to 90 billion". He leaves the inference that we must have 90 billion in our Atlantic, too. Not likely, given that Brazil is a hemisphere away.
Is Modern Drilling Safer? Proponents of drilling regularly say modern oil production is much safer. "Environmentally friendly", the White House calls it. Media commentators regularly repeat this claim, but there is a need for substantiation.

George Will says there has not been a major spill from an offshore U.S. well since 1969 (which would be Santa Barbara) and that Katrina and Rita destroyed or damaged hundreds of drilling rigs without causing a "large" spill. "Large" disguises the fact that there have been spills — 124 smaller spills that the Coast Guard says released more than 700,000 gallons of petroleum products. The government will not admit to crude oil spills in the Alaskan or Beaufort Seas but the NRDC reports:

"Spills are an everyday occurrence in Arctic oil drilling: the oil industry reported 4,534 spills across Alaska's North Slope and Beaufort Sea from 1996 to 2004, involving more than 1.9 million gallons of diesel fuel, oil, acid, biocide, ethylene glycol, drilling fluid, and other materials".

Charles Krauthammer, a conservative columnist for the Washington Post, also cites Katrina and Rita to make the case that modern drilling is safe and hasn't "resulted in spills of any significance". Yet three paragraphs after assuring us that drilling today is done with "far more environmental care", he tells us that not drilling off our shores just moves "despoliation" elsewhere, such as the Niger Delta, where "oil spillages poison the lives of many of the world's most wretchedly poor".

Deep-sea drilling ships cannot be anchored to the seabed, which can be up to 10,000 feet down. Moved in all directions by wind, currents, waves, they use global positioning satellites to drive an array of propellers to constantly reposition themselves over the same spot. All the while they are tethered by a miles-long skein of drilling pipe, which could someday snap in a severe storm.

Even if we accept that oil companies have improved their record, extensive drilling across a span of future years means that a major spill off our coastline, brought about by accident or storm, cannot be ruled out, and should be allowed for in making our decision of whether or not to lift the ban.
Who Benefits? Certainly the oil companies. They are increasingly eager to add to their assets. With 77% of world oil reserves now state owned, nationalized oil has become the trend. There are 13 state-owned oil companies controlling more reserves than ExxonMobil, the largest multinational company.

American companies are being boxed out. Russia is using environmental claims to stall multinationals developing the rich oil and gas deposits of Sakhalin Island northeast of Japan. Venezuela has been confiscating majority interests in projects underway in the heavy-oil fields of the Orinoco Belt. Mexico, another key supplier to the U.S., has never allowed outsiders (and is in serious decline).

Oil discoveries measured in billions of barrels promise an enormous windfall to the oil companies, even at the huge costs of operating at sea. The question is whether we are we likely to see a repeat of the 1990s, when Congress waived royalty payments to encourage deep-water drilling in the Gulf of Mexico. Royalties were to be triggered only when the price of oil rose beyond a given threshold, but for two years the trigger clause was left out of some 1,000 leases. And now the oil companies are challenging the government's right to impose a trigger at all. Losses to taxpayers are reckoned at $53 billion.
End Result? As seen, oil would not arrive for more than a decade if the U.S. were to expand drilling at home. Prices would be affected only marginally, given that the U.S. has only 3% of known world reserves.

Nor would we keep the oil that the companies produce. It would be sold on world markets. In fact, that is the one positive claim to be made for opening drilling in moratorium zones: America would be producing more of a product that, whether sold to the world or used locally, would work a mix of reducing imports and the trade deficit while generating royalty and tax revenue. That is, if Congress could resist turning such a program into another giveaway.

So there is no clear fix, quick or otherwise. The coming worldwide competition for oil looks like it might well drive costs ever higher and raises the still more alarming prospect of shortages as part of daily life. The best immediate defense, while we develop alternate forms of energy for the long term, is conservation.

We could be happily surprised by how higher prices bring down demand and increase supply so that oil will still be expensive, as it should be, but less than $140 a barrel.

Stephen Wilson