10.It is simply a function of supply and demand.
Clearly the price of oil is due to more than simple supply and demand. While the supply/demand relationship has tightened, there has been no significant change in supply and demand since a year ago and during that time the price of a barrel of light sweet crude has doubled. Supply and demand is the most important long term factor, but it is not the whole story for the latest bull run in energy.
9.If we allow offshore drilling and drilling in ANWR the environment will suffer.
In some sense this is true, if we are thinking only of America (which, given our ethnocentrism that is often all we are thinking of.) Demand will increase. Supply will increase in kind. The only question is where the supply will come from. If we do not increase our supply, the increase will happen somewhere else like Saudi Arabia or some small African country being exploited for their oil. The US is likely better than anyone else at preserving the environment while drilling. But hey, as long is its not in our backyard, right?
8.Oil companies are gouging consumers with their record profits.
It is true that Exxon Mobil has had record profits during its recent quarters. It is also true that they are the largest company in the US. I don't know about you, but when I hear that the largest company has the largest proft in dollar terms I think, "Well, that makes sense." We may as well say that New York is gouging its citizens because they collected $63M in taxes while North Dakota collected on $1.7M. If we look at a true comparable measure of profit, profit margin, we see that ExxonMobil saw a profit margin of about 8.5% the last quarter. There are more than 1800 companies with a larger profit margin in the US.
7.A windfall profits tax on big oil will put money in the pockets of average Americans without raising the cost of gas.
Mr. Obama has advocated taxing big oil like ExxonMobil and return that money back to those who have to suffer through these high gas prices. I don't blame Obama for the bad idea- it was probably from an advisor, but he really needs to screen those. Exxon has a duty to its shareholders (many of whom are invested in mutual funds and are living off the dividends from that stock) Exxon will protect its profit because that is how it pays its dividends. Should their taxes increase, costs will go up, thus gas prices will go up. Oddly enough, the people who would benefit the most are the ones who are affected the least by gas prices. Americans would all get the same $1000 relief check, but when that causes gas prices to go up, the largest consumers of gas (generally truck drivers and owners of older, less efficient cars) would hurt the most.
6.We can lower energy cost by investing government funds in alternative energies.
This one gets a partial fallacy. Temporary government incentives can jump start new technologies that may have a positive impact on our energy situation. The problem is that it can also actually make it worse. Ethanol is a great example. It is not now economically viable without significant subsidy, and it is unlikely to ever be. The alternative energy that will be a long term solution will be the one that is simply cheaper without subsidy. Even if the US managed to legislate the use of cleaner but more expensive energy do you really see developing countries like China signing up for that? Me neither.
5.Oil from offshore drilling will not be available for 7-10-15-20 years (the number of years seems to grow with each news cycle).
The nearest Outer Continental Shelf (OCS) sites could be in production within 3-4 years; those further out are likely to see production in 5-7 years. The most difficult site that has no preparation yet could be as long as 7-10 years away. The EIA's now famous 2007 study predicted that the areas in question could reach significant production by 2017, but they also assumed that the moratorium would remain until 2012. That means five years from the moratorium lift. That could be lifted any day Congress decides to come back from vacation and accomplish something.
4. Estimates put the total oil available in the OCS at less than 20 billion barrels.
The simple explanation is that these figures are based on an outdated system that has since been improved for locating and quantifying oil and natural gas deposits. These figures are also based on $50/barrel oil prices. When determining the amount of deposits, the only deposits that are included are those that can be extracted for less than $50/barrel. That means that deposits that would not be economically viable at $50/barrel were excluded. There are a great deal more sites that are economically viable now that oil has surpassed $100/barrel. (There is information on that if the report linked above, or for shorter mentions at these Washington Post and Slate articles)
3.1-2 million barrels of oil per day (the amount estimated in the OCS proven reserves) is only 1.5% of world production, thus not enough to significantly impact the price of oil.
The important number to consider is not the percentage of worldwide production. The important figure is the gap between supply and demand. The closer the supply and demand number are, the higher the price will go and the more volatile the market will be. This graph shows the surplus daily supply. As you can see the surplus in 2008 is around 1.5 million barrels/day. An increase in world supply of 1-2 million barrels/day would double that spread. That is significant, and would have a terrific impact on the price of crude oil.
2.Simply opening the strategic oil reserve will have a significant impact of gas prices.
The strategic oil reserve is capable of releasing about 4 million barrels/day for about 17 days. It is possible that this could have some impact on price, but it is likely to have an impact of only a few cents for a few weeks at best. If it were a long term source of additional production, its impact would be much greater, but it is not. As part of a larger increased drilling strategy it could play a more significant role.
1.Oil companies already have 68 million acres of land that they are simply choosing not to drill on. If they would drill on those acres they could "nearly double total U.S. oil production."
I hope I do not have to hear this one much longer. Democrats are trying to pass a bill that would require oil companies to use current leases are loose them. The bill proposal says that if they use all the land they currently occupy they could double their production. This is extremely unlikely. To start with, most of that land has been explored and does not have enough oil to warrant drilling. Some is seismically unstable. The doubling number comes from assuming that the unused land would be just as productive as the currently productive land. The fact that the unused land has been virtually completely explored and deemed inaccessible or unprofitable was simply ignored. Not the best reasoning skills there. If oil companies could produce more oil and sell it for $130-140/barrel, I assure you they would.
8 comments:
I'm glad you're blogging again. Thanks for laying these out and making it easy to understand the implications.
Very nice post. In all honestly this a very professional looking essay and is much better than most of the stuff I've been reading lately. You should try to publish this on a bigger site or something.
This post has made me believe that there is hope for our future. Finally a young mind that isn't full of mush!!
Even if we start going at it tomorrow, the effects are still very, very long term: "The projections in the OCS access case indicate that access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030." (So I guess it would be 2026 if we started immediately) This is quite contrary to the fast-track price reduction McCain has been touting.
Also, EIA has deemed the entire impact to be pretty irrelevant: "Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant."
Hopefully by then, the economy will have shifted towards hydrogen. From what I've read about hydrogen fuel, it is somewhat cheaper. The prices per kilo vary on it of course, but at the few existing stations, it's generally slightly less than gas per gallon. Which in fact makes huge savings, as hydrogen cars get 2-3 times more mileage out of the equivalent energy. Also, I believe this is without subsidy. But I could be wrong. I know DOE was trying to target $2.50/gallon by 2010, but I believe this was to be through new technologies, not direct production subsidies.
I'll leave Jason to deal with the oil stuff (which I assume would expand number 5 and explain how the futures market works).
I personally am not all that supportive of the hydrogen car at this point. I'm not necessarily against it, but I like McCain's idea to develop better batteries for electric cars and build more nuclear power plants. It seems like a good combo that is a bit more realistic in the short term than hydrogen. Gas stations would still have to adapt for electric cars, but it's much easier to transport electricity than hydrogen. And, despite what Jane Fonda thinks, Nuclear power plants have had excellent safety records as long as they aren't run by disgruntled ruskies being paid in potatoes that they undoubtedly turn around and make into vodka. Plus the idea of a pressurized tank scares the crap out of me. Imagine 20 years from now when some 16 year old kid is driving a rusted out first generation hydrogen car while he plays with his hologram phone or whatever with a tank full of pressurized Hindenburg. Maybe they have some cool plans for these cars, I guess we'll have to see.
As I mentioned in the post, production if begun immediately would begin within 5 years. 2030 is when the EIA predicts we would be at full production. This prediction is based on hefty bureaucratic delays which do not have to exist and are less likely to exist the higher oil prices go. It is important to remember that the report was written when oil prices where half the price they hit this year. Full production would exceed 5 million barrels/day. That only includes proven and likely reserves. So much is unexplored that there may be much more. In estimates I used in the post I was only counting on the 1.5-2 million barrels/day that would be available in the early stages.
As to the assertion that due to oil being a global commodity the modest increase in supply would not affect price refer back to #3. It the the change in supply/demand spread that is really important not the percentage of overall production. This is the same with virtually all supply/demand relationships.
Finally, it does not matter if we are talking about increased production in 3, 5, 7, 10, or 15 years. This is where the EIA really missed the boat, and many analysts did as well. The people that they should have been talking to are stock brokers and futures traders. Oil is priced based on future prices which are based on future supply and demand, just like the rest of the market. If there is promise of future supply then short selling will immediately start shorting oil futures which will drive down prices. It works the same the other way to. If we find out that supply will be gone in 20 years, but that demand is on pace to remain the same, futures would be bid up and prices would increase. Markets trade on what will happen, not what has or what is.
As far as alternatives hydrogen is interesting but poses some problems. The National Research Council recently reported on the prospect of hydrogen power to Congress. The believed, optimistically, that the unsubsidized cost could be competitive with conventional vehicle costs by 2023. That includes the cost of vehicle plus cost of fuel over the lifetime of the vehicle. In the meantime it would require tremendous subsidies to even get to that point, similar to ethanol subsidies now. That is not to say it would not be worth it, but it is not totally clear at this point.
More immediately natural gas powered cars seems to make the most sense until we get to totally renewable power. It is a technology that is not entirely different than current cars and is significantly cheaper and cleaner than gas now. There are also natural gas distribution points all over so adapting that for cars would be relatively simple.
Regarding possible harm to the environment, we HAVE had a pretty good record of avoiding environmental disasters while drilling. And offshore oil rigs can actually be seen as good for the environment. They not only decrease the amount of oil leeching from the sea floor into the surrounding habitat, but also provide an artificial reef in which coral and other marine life can thrive. Hooray, oil platforms!
I don't think Brian is coming back.
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