Drill, baby, drill: The myth of energy independence

Seattle Times, Jon Talton
We’re told that President Obama’s political calculus in opening large areas off the U.S. to new oil exploration is to gain bipartisan support for comprehensive energy and climate change legislation. If so, it’s a fool’s errand. Even though presidential candidate John McCain supported the kind of drilling and nuclear power now backed by Obama, the Republican party is united in its unwillingness to support this administration.

The economics of the matter are equally clear-cut and unforgiving. As more of the developing world industrializes and adopts American car culture, demand for oil is rising at a rapid rate, far more than new production can handle. Also, light sweet crude, the cheapest and easiest to extract and refine, is in decline in many regions and is probably in absolute global decline. The remaining oil will be costlier when it reaches end-users, whether manufacturers or drivers. This is no small matter considering that the structure of the global economy, including international supply chains, has been based on a cheap oil era.

Alternatives provide little relief from this reality. They generally require more energy inputs than the new energy they create; even “green” alternatives often require large inputs from fossil fuels. And they can produce unintended consequences, from disrupting the food supply to environmental damage.

As for oil itself, although the world is at or near peak, we’re not “running out.” The remainder of this one-time gift of geology will just be more expensive and harder to find, extract and refine. But because oil tends to trade in a world market, we will find ourselves bidding against every other nation. Some will also try to protect domestic supplies, as was happening before the Great Recession. In any event, most oil is controlled by national entities, leaving the American majors — who sell in the world market — with a small share.

The end result is we’re probably going to need every kind of energy source for the future, but we need to be clear about the trade-offs and adjustments necessary. If we attempt to sustain the current American lifestyle, that, too, will be a fool’s errand. We can’t drill, baby, drill, back to 1965. On the other hand, the recession has provided a breather to make a transition — if we have the will and imagination to make it.

One other thing is clear: Nations will increasingly be in competition in the new energy era. Not for nothing has China declared renewables a strategic industry and is aiming to dominate the market not just in manufacturing but research. China has also quietly lined up its own overseas oil supplies, even as America maintains military in the Persian Gulf partly to enforce the Carter Doctrine (yes) to protect our national energy interests. This portends an uneasy future of global competition for resources. It could also, if we got our act together, mean new jobs and industries — including building more transit and rail to give people choices…
(31 March 2010)

Obama to Open Offshore Areas to Oil Drilling for First Time

John M. Broder, New York Times
The Obama administration is proposing to open vast expanses of water along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska to oil and natural gas drilling, much of it for the first time, officials said Tuesday.

The proposal — a compromise that will please oil companies and domestic drilling advocates but anger some residents of affected states and many environmental organizations — would end a longstanding moratorium on oil exploration along the East Coast from the northern tip of Delaware to the central coast of Florida, covering 167 million acres of ocean.

Under the plan, the coastline from New Jersey northward would remain closed to all oil and gas activity. So would the Pacific Coast, from Mexico to the Canadian border.

The environmentally sensitive Bristol Bay in southwestern Alaska would be protected and no drilling would be allowed under the plan, officials said. But large tracts in the Chukchi Sea and Beaufort Sea in the Arctic Ocean north of Alaska — nearly 130 million acres — would be eligible for exploration and drilling after extensive studies.

The proposal is to be announced by President Obama and Interior Secretary Ken Salazar at Andrews Air Force Base in Maryland on Wednesday, but administration officials agreed to preview the details on the condition that they not be identified.

The proposal is intended to reduce dependence on oil imports, generate revenue from the sale of offshore leases and help win political support for comprehensive energy and climate legislation.

But while Mr. Obama has staked out middle ground on other environmental matters — supporting nuclear power, for example — the sheer breadth of the offshore drilling decision will take some of his supporters aback. And it is no sure thing that it will win support for a climate bill from undecided senators close to the oil industry, like Lisa Murkowski, Republican of Alaska, or Mary L. Landrieu, Democrat of Louisiana.

The Senate is expected to take up a climate bill in the next few weeks — the last chance to enact such legislation before midterm election concerns take over. Mr. Obama and his allies in the Senate have already made significant concessions on coal and nuclear power to try to win votes from Republicans and moderate Democrats. The new plan now grants one of the biggest items on the oil industry’s wish list — access to vast areas of the Outer Continental Shelf for drilling…
(30 March 2010)

Expect a new peak for oil next year

Jeff Rubin, The Globe and Mail
What does $80-per-barrel oil say to you?
Three years ago, it would have told you that global oil markets were at record tightness. Back then, the U.S. president was making a personal pilgrimage to Saudi Arabia to vainly plead for more production. And economists were worrying about the implications for global economic growth.

Today, it seems the goalposts have suddenly moved. After filling up on $4-per-gallon gasoline only two Memorial Day weekends ago, today’s $2.20-per-gallon average gasoline (XRB-FT2.330.020.98%)price doesn’t seem so expensive to American motorists anymore.

Gas prices over $5 per gallon are posted at a gas station in Gorda, Calif., March 11, 2008.

And suddenly, $80-per-barrel oil (CL-FT85.061.301.55%)is no longer seen by the Saudis as threatening global oil demand, but is instead viewed as a minimum price for their nation to invest in new supply. And as far as my fellow economists are concerned, we’ve heard not even a peep from them about what these types of oil prices may mean for the global economy in the days ahead.

But how much longer can the world pretend that it won’t soon be facing another energy shock, one every bit as challenging as the one it faced two years ago?…
(31 March 2010)

So Much for Peak Demand… Try 134mb/d by 2030

Eamon Keane, Seeking Alpha
“So much for peak demand – try 134mb/d by 2030.” That was the startling conclusion dispatched from the ivory tower recently by Joyce Dargay, a British transport econometrics professor, and Dermot Gately, an American economics professor. I’ll present their conclusions and then discuss the implications.

Their report is available here [pdf]. The main conclusion is that the low hanging oil fruit has already been picked after the 1970’s oil shocks. From 1978-85 OECD fuel oil consumption dropped by 7mb/d and then from 2003-2008 by another 2mb/d. The share of fuel oil in OECD consumption has fallen from 44% to 16% today, so there is not much left to cut. The authors estimate the price and income elasticities of different components of oil consumption in the OECD and other blocs.

The OECD oil demand response to higher incomes over the last 40 years is shown in Figure 1. The equi-proportional growth lines indicate the slope oil demand should have if it is proportional to income growth. It can be seen that fuel oil dramatically drops off, however per capita transport and other oil remained reasonably correlated with income growth…
(19 March 2010)