What Domestic Oil?

This is a response to William Balgord’s guest column in Sunday’s (10/12/08) Wisconsin State Journal. In the column, Mr. Balgord more-or-less takes the “Drill Baby Drill” chant from the GOP’s convention and stretches it out for 800 words or so.

The article makes the following points, to which I will respond:

1. The “windfall profits” tax the congressional Democrats have been touting will hurt the average American investor.

To some extent, this may be true. However, it is not a good argument against corporate taxes proposed to address a specific situation. I don’t like the idea of corporate taxes at all – I think that the people who profit should be taxed, not entities – but this sort of populist propaganda (he specifically mentions “retirees, union workers and other hard-working individuals”) misses the mark. Any investor making income on stock should pay the same tax that any “other hard-working individual” does on payroll income. If there is a decent argument against these tax proposals it should be that it takes money away from exploration.

2. There are billions of extractable barrels of reserves around the world that are currently not being exploited (the author includes the Arctic, Oil Shale and off-shore deposits).

The problem with the three sources mentioned is the price point of oil at which these reserves are profitable. If oil is $150-200/barrel, many of the reserves the author mentioned would be worth it financially to exploit. There are two problems there, the first is the infrastructure necessary to exploit these deposits does not currently exist. It can be built, but when? Who pays? The second problem is that these price points are not affordable economically as was demonstrated over the summer.

The author states that “these are available and their use will be necessary to make an orderly transition to the future.” The problem is that they are still available because they are not affordable. There are some regions that can and should be explored including ANWAR and the continental shelf. I contend that any environmental cost that may be felt would be offset by the economic benefit of not exporting our collective wealth to any state willing to sell us their oil. The exploitation of the North Sea has shown that offshore drilling can be done relatively responsibly as well.

3. Stagnating oil production is all OPEC’s fault.

This is 20th century thinking at its worst. You can look at hard numbers to find out that exploration worldwide has boomed since the spike in oil prices in the past 5 years. The problem with OPEC is that they have very little excess capacity to bring online at current production levels.

4. Stagnating oil production is because of poor deployment of technology.

Mr. Balgord states that “Russia and Mexico are lagging behind in modernizing their oil fields.” So, the problem is a lack of technology improvements on existing fields. The problem with his argument here is two-fold as well. First, the modernized infrastructure is not readily available for deployment. Second, again as North Sea exploitation shows, the implementation of the most modern extraction techniques cause earlier well peaks, and higher decline rates. In other words, the aging fields in Russia and Mexico would only benefit for a short while from the introduction of such technology, with higher post-peak decline rates.

5. More areas need to be opened to exploration.

The author clearly doesn’t understand what is important in energy economics. Reserves are essentially meaningless. The only thing that matters is flow rates. Barrels produced per day are the measure of success, and of survival. Finding new oil in up-to-now unexplored regions mean nothing until they produce. The exploration really can’t even get underway in a serious way because the exploratory rigs and expertise required to run them do not exist. It will take years, and billions of dollars, to build and staff these rigs. In case Mr. Balgord hasn’t noticed, these are two resources America is short of at the moment.

6. Recently high oil prices are a result of speculation and the OPEC cartel.

This is absolutely false. Recently high oil prices were the result of market mechanisms (high demand and limited spare production capacity), a weak dollar and geopolitical instability. Speculation is integral to finding price points in a market. Without these free market principles, prices would not react and shortages would soon follow.

7. “Access to the outer continental shelf would ultimately increase our domestic reserves by more than 500%.”

Whether or not this number is accurate, as I stated before “reserves” mean absolutely nothing. For example, you can have a million dollars buried in your back yard (you might want to check), but if you don’t have the tools to dig it up and start pulling it out, it serves absolutely no purpose.

Conclusion

Mr. Balgord’s proposals regarding oil merit little place in a serious discussion about America’s energy future. His solutions are not feasible at reasonable price points or they are unrealistic all together. The United States will likely never produce much more oil than it does today due to the fact that the best reserves have already been exploited beyond their peak production levels. This means that just to keep up with current levels of production we need to bring more and more oil online, but the new production would only be temporary. The newer sources of production will also be an order of magnitude lower than previous projects. Easing environmental regulations and opening the most promising regions up to exploration is a great idea if energy is the only metric. It is still reasonable, but not quite so appealing, even when environmental degradation is taken into account. However, any supply side solution should be accompanied by ambitious conservation measures, which is something that Republican or Democratic politicians will likely be unable to accomplish until the problem is past a point of reasonable resolution. It is also my opinion that we are already well past that point, by the way.

Sincerely Fucked,

mike