Hair of the dog
posted by saurabh in Galloping idiocy, Petrolatum |The stakes are high for our citizens and for our economy, and with gasoline running at more than four bucks a gallon, many do not have the luxury of waiting on the far-off plans of futurists and politicians.
This, from a speech McCain is to give on the subject of opening up offshore drilling. Some of you may recall that when last we left it, the question had been broached and approved in the House, which voted 232-187 in favor of allowing offshore drilling beyond 50 miles from any coast (with an option to ban in the 50-100 mile range by individual states). Subsequently it languished in the Senate, and has now been reintroduced as the “Deep Ocean Energy Resources Act of 2008″ (with exceptions for Florida and California, the most beach-dependent and therefore most recalcitrant).
Bush has done McCain one better and also proposes opening up a bit of ANWR for exploration and development. Politically this is a good time to propose these things, because the price of gas is absurdly high (round these parts nearing $5/gallon) by American standards. It’s a moment for feel-good solutions, even if they won’t manage to actually stave off the high prices for the next few years. Oil companies still rely on exploration, and exploratory drilling, all of which takes quite a while even before you get to the point of setting up a well. So charitably speaking, even if we manage to pass this bill and open up the outer continental shelf for exploration by 2009, it won’t make a lick of difference to oil prices for, minimally, the next few years, and realistically the next few decades. As campaign rhetoric goes, this is merely, well, campaign rhetoric.
The department of Interior’s Minerals Management Service estimates that there are about 86 billion barrels of technically recoverable reserves waiting for us in the US outer continental shelf. To put this in perspective, current US total reserves amount to less than 21 billion barrels. This represents quite a bit of oil, and at current prices of $136/bbl, it’s also a lot of money ($11.7 trillion). Ostensibly, of course, the goal of this effort is to reduce that bloated figure, but it’s not necessarily the case that it will do so. All other US reserves are in terminal decline. Oil production follows a more-or-less bell-shaped distribution, as once a region is open for discovery it is methodically explored and exploited. US productivity history looks like this:
In about thirty years we’ll be bone-dry if we don’t develop our offshore resources. Most of the rest of the world is in the same situation. So by the time we do get those offshore fields into production, it’s probable they won’t be able to make up for the intervening aggregate loss in production.
This isn’t necessarily catastrophic, if we ignore our various environmental concerns. Developing our energy infrastructure need not be a zero-sum game, and we can certainly imagine that this offshore exploration might continue apace with the development of other technologies that obsolesce it before it even becomes problematic. Political will, however, is definitely no better than a zero-sum game, and probably has diminishing returns over time. Adopting more oil production as our forward-thinking energy model doesn’t set the stage for the kind of century I had in mind.
ADDENDUM: For some typical commentary, see this one by Charles Krauthammer (presumably so named because he is the scion of a family of cabbage-beaters), where he excoriates McCain for not going far enough with his oil-exploration madness, but ignores the fact that the exploration he is touting won’t actually earn us any energy independence, especially as compared to, say, developing alternative energy sources. I will never understand why, when you are discussing questions that depend on fundamentals of geology, you ignore the fundamentals of geology.
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Are you sure it won’t affect prices quickly? It seems that futures markets (a.k.a. evil speculators) play a large role in setting oil prices, and so today’s high prices may largely reflect pessimism about future supply.
Of course, it probably won’t affect them very much, but that’s another story.
Well, I’d definitely trust the speculators to be smarter than the American public about the effect this would have on short-term supply, firstly. I don’t know shit about investment, but there’s been plenty of bearish talk regarding oil prices - at least in the latter half of 2008, when the oil price kept on skipping higher and higher, despite people saying it was going to collapse any minute. So blaming it mostly on investors seems wrong to me…
This is a bit out of date, coming from 2005; it says oil futures are an unbiased predictor of future spot prices, but they are very inaccurate (i.e. often way too high or way too low):
http://www.frbsf.org/publications/economics/letter/2005/el2005-38.html
If oil futures did drive the spot price, I’d expect them to be pretty accurate predictors. But I don’t really know anything about how speculation bubbles work, so maybe I’m totally off-base here.
overall i’m against developing those wells. they’ll still be there later if we can’t live without them. right now we have no self-discipline and no plan to avert disaster. when we’ve proven we can control our appetites i’ll reconsider it.
Oh, I don’t necessarily think there’s a bubble now and my reference to “evil speculators” was meant to be tongue-in-cheek: I think the high prices represent genuine pessimism about future supply that represents the best guesses of the most-informed traders. But yeah, they’re noisy guesses and could well be wrong.
All I was saying is that the future’s market does provide a mechanism for predictions about the future to influence prices today. But…. probably too weak a mechanism in this case.
There is way too much oil. If we use anywhere near all of it we’re doomed. Venezuela alone could feed the world’s current 85 million barrel a day diet for how many years? 85 million barrels/day * 365 days = 31 billion barrels a year, so with about 300 billion barrels of reserves, that’s about 9 or 10 years. Saudi Arabia has about that much as well. Russia, the U.S. and Canada together have at least that much. So at current consumption, with no help from new finds, we can go 30 years just puffin away.
I’m increasingly in favor of offshore U.S. drilling, though, for two reasons. First, I think if people want to use a polluting resource, they should live near its source so they have to live with the consequences. Today, those consequences are outsourced to Nigeria and elsewhere.
Second, the U.S. has among the strictest environmental rules of the top 10 oil producing nations. I mean really, who do you trust with your oceans:
Saudi Arabia
Russia
United States
Iran
China
Mexico
Canada
United Arab Emirates
Venezuela
Norway
We U.S. residents get so used to condemning our government that it becomes easy to forget how bad the others are. Canada, for example, has destroyed its oceans with salmon farming, which is still not widely practiced in the States.
And finally, there’s the minor issue of eating locally. There is a small efficiency gain in not having to ship oil around the world before burining it.
PS look what was released today, one of my favorite annual reports. U.S. Energy Department Annual Review 2007 (PDF)
I don’t like the ‘replace more polluting producers’ argument. No one is suggesting that when we start ruining our shores the Nigerians will stop ruining theirs… we’ll just drink more oil.
maybe we should buy nigeria.
Okay, you know that I’m all about pulling statements out of my butt and not thinking them through, but here goes…
I heard somewhere that no one needs to be drilling any more oil, that there’s PLENTY of oil. The oil companies just need to be building more refineries, which they’re not doing for some reason. And it’s got nothing to do with government regulation, they’re not even TRYING to build more refineries. If we had a few more refineries, we wouldn’t have to drill any more, we’d be able to manage on what we’re getting now.
Or something.
Refineries affect the price of gas, not the price of oil. Refining capacity IS tight, but I, for one, don’t believe that refineries are even mostly to blame for high gas prices. Refining capacity should be tight from a business perspective (idle refineries are just a waste of money), so it’s hard to blame them for that. There’s some claim that environmental regulation makes it impossible to build new refineries, but that’s dumb, frankly. When the demand is there, they’ll build the things, because they’ll be able to make mone hand over fist anyway.
About 75% of the price of a gallon of gas comes from crude oil. Refining contributes about 10% (according to the EIA), so it’s hard to accept that the ballooning price is not due to the spike in oil prices.
They are building lots of new refineries, but they’re putting them in India and China. It’s true that they are all but impossible to build in the U.S. and Canada, but those refineries that exist there now have more capacity than they did a decade ago. In a decade world refining capacity grew from 76 to 85 million barrels a day according to that document I linked above. It has gotten very expensive to build new refineries, even in countries with weak environmental laws, as the steel and engineering have grown pricier along with all other oil-related goods. A 300,000 barrel a day refinery now costs $6 billion, which is real money even for a big oil company.
About the argument of whether the U.S. should pump offshore or not, I hear what you’re saying that more supply will quickly lead to more demand, and vice versa. That appears to be quite true — note how additional pumping in Saudi Arabia in the last month has done little or nothing to halt the upward march of oil prices. But still, I would rather the U.S. buy its oil from Florida and California than from Nigeria and Venezuela. And also to use much, much less of the stuff. You know that the U.S. still uses 3x as much oil as China for 1/4 the population.
How does one delete a previous comment? (I can’t figure it out, nor can I find your email so am leaving this new comment.)