The Truth About America’s Energy – Part 1


Posted by AzBlueMeanie:


For the past couple of weeks, John McCain and the GOP have been hitting the airwaves to sell McCain’s "new" energy policy.  There is nothing "new" about his policy – it is essentially Dick Cheney’s secret Energy Commission Plan from 2001. 

The only thing "new" is that McCain has reversed his previous opposition to lifting the moratorium on off-shore drilling in environmentally sensitive coastal areas, although he continues to oppose drilling in the environmentally sensitive ANWR in Alaska.  I suppose this is his attempt to maintain the fiction of his "maverick" image by opposing his party on an issue it supports, and a vain attempt to convince people he is an environmentalist.

Add to Cheney’s Energy Commission Plan McCain’s gimmickry of a summer gas tax holiday (which only benefits oil producers) and his newfound interest in being Monty Hall on Let’s Make a Deal by giving a $300 million prize to whomever invents the next generation electric car battery.  Newsflash John, it already exists! 

Each of Detroit’s big three auto makers and the Japanese auto makers already have hybrids, flex-fuel vehicles, and all-electric vehicles in the production pipeline for the 2009 and 2010 model years (they are already running advertising campaigns).  Exxon-Mobil is currently running a television ad about its lithium-ion battery, and Toshiba announced its lithium-ion battery in December 2007.  Market forces are already leading the way to innovation, not government game show gimmicks. 

McCain and the GOP have been allowed to frame the debate over high oil (gas) prices as a simple supply and demand problem by our economically ignorant news media, most of whom never even took Econ 101 in college, and if they did, I suspect they received no better than a gentleman’s "C" and have since forgotten anything they ever learned.  Economics news today is limited to "the stock market went up/down today by ___ points.  Moving on to other news…" 

What has been almost entirely absent from the discussion of high oil (gas) prices is any discussion of the role that U.S. fiscal policy and budget policy play in the price of oil, and the role of speculators hedging against inflation and the devaluation of the dollar in unregulated index fund markets.  (More on this in later posts).

The price of oil and how we came to this place is far too complex a subject to explain with a simple explanation.  But let’s begin with addressing the GOP over-simplification that this is a simple supply and demand problem.

Supply and Demand

There are really two supply issues: the short-term supply-to-demand ratio, and long-term "peak oil" production. 

You may recall that in 1999 there was a surplus in oil production of almost 7 million barrels per day over daily demand.  The price of oil fell below $20 per barrel (as low as $10 per barrel for some domestic crude), and U.S. retail gas prices at the pump dipped below $1 per gallon.  In response, U.S. oil companies shut down and capped oil wells in the U.S. because it was no longer profitable for them to produce oil in a surplus market.  OPEC also adjusted its oil production output as well.

It did not take long before this adjustment in oil production output reduced the surplus supply-to-demand ratio to only 1 million barrels per day over daily demand (adjusted for increased demand on the world market from emerging markets such as China and India).  This was not enough of a cushion to cover a disruption in the oil supply.  This allowed oil producers to charge a premium based upon short supply and any market concerns over disruptions to the oil supply (i.e., 9/11, the war in Afghanistan, the war in Iraq, saber rattling against Iran, etc.)  The surplus supply-to-demand ratio has recently improved somewhat to around 2 million barrels per day over current daily demand, largely due to reduced U.S. demand (Americans are driving less because they cannot afford the price of gas, and the U.S. economy is sliding into recession).

The current GOP talking point is that the U.S. can domestically drill its way out of dependence on foreign oil.  This is delusional.  The U.S. has less than 3% of proven oil reserves, but consumes 25% of the world’s oil supply.  Even if all proven domestic oil reserves were somehow magically in production today – a fantasy – it would only last for a relatively brief period of time, and would only have a marginal effect on the price of oil (world demand for oil is projected to increase 37% over 2006 levels by 2030). There is also no guarantee that the oil produced domestically would be available exclusively for U.S. consumption.  It would, per usual, be sold on the world oil market to any bidder.

The U.S. House Committee on Natural Resources has issued a report entitled "The Truth About America’s Energy." Facts and figures provided by the Energy Information Administration and the Department of Interior clearly illustrate that oil producers already have the means to increase domestic oil and gas production even without ANWR or lifting the moratorium on off-shore drilling in environmentally sensitive areas:

On the Outer Continental Shelf, 82 percent of federal natural gas and 79 percent of federal oil is located in areas currently open for leasing. Onshore, 62 percent of oil and 84 percent of natural gas resources are either fully accessible under standard lease stipulations designed to protect lands and wildlife, or will be accessible pending the completion of land-use planning or environmental reviews. Between 1999 and 2007, drilling permits for oil and gas development on public lands increased more than 361 percent. Since 2004, the Bureau of Land Management has issued 28,776 permits to drill on public land; in that same time, only 18,954 wells were drilled. Oil and gas companies have stockpiled nearly 10,000 extra permits to drill that they are not using to increase domestic production.

Onshore, of the 47.5 million acres of federal lands leased by oil and gas companies, only about 13 million acres are producing oil and gas. Offshore, only 10.5 million of the 44 million leased acres are producing oil or gas. Combined, oil and gas companies hold leases to nearly 68 million acres of federal land that are not producing oil and gas. The 68 million acres of leased, inactive federal land could produce an additional 4.8 million barrels of oil and 44.7 billion cubic feet of natural gas each day. That would nearly double total U.S. oil production, and increase natural gas production by 75 percent.

* * *

[T]here are nearly 91 million acres currently open to leasing in the Arctic region of Alaska, including onshore and offshore lands. Oil and gas companies have leased only 11.8 million of that acreage. Within the National Petroleum Reserve-Alaska, oil companies have leased 3 million of 22.6 million acres available to lease. No production has occurred on any of those lands and industry has drilled only 25 exploratory wells there since 2000.

* * *

Development of and production from the 68 million acres currently under lease but not in production would cut U.S. imports of oil by one third. Add to this mix the thousands of existing wells in states such as Texas and Oklahoma that were capped off after imported oil dropped to $10 a barrel and could be reopened to immediately increase production.

Editorials – (by Agnes Witter).  This is worth repeating.  Oil companies could double domestic oil production and reduce U.S. dependence on foreign oil imports by one-third with the 68 million acres currently under lease but not in production.

So ask yourself, why are Republicans in Congress demanding that ANWR and additional off-shore leases be opened up to the oil companies when the oil companies have failed to fully utilize the leases already available to them? 

This is really about a federal land grab by the oil companies and their willing accomplices in Congress.  Making more federal land available for oil leases will not result in any more oil being produced for domestic consumption.  Oil companies will determine the supply-to-demand ratio based upon the world market and their profit motive.

A related GOP talking point is that the oil companies have not built a new oil refinery in the U.S. in over 30 years.  This is true.  In 1982, the earliest year for which the Energy Information Administration has data, there were 301 operable refineries in the U.S. which produced 17.9 million barrels of oil per day.  Today there are only 149 operable refineries (or fewer) which produce 17.4 million barrels of oil per day.  This is not enough capacity to meet our current daily demand of around 20 million barrels per day. 

There was a surplus of refining capacity in the 1980s and 1990s, so refiners shut down unprofitable refineries.  The head of the National Petrochemical and Refiners Association testified at a House hearing that the rate of return on investment in refining averaged just five and a half percent between 1993 and 2003.  (At the rate of 150,000 barrels per day, a refinery would have to operate for almost 13 years before its profits outweighed the cost of building it).

In 2001, Senator Ron Wyden (D-Oregon) presented to Congress a report demonstrating that refinery closings were calculated business decisions intended to increase oil company profits.  Fewer refineries meant less production in circulation, which meant a lower supply-to-demand ratio and more profit.  Wyden’s report contained internal memos from the oil industry indicating that this reduction was a deliberate attempt to curtail profit losses.  See, Does the U.S. lack sufficient oil refining capabilities?

So the truth is that there is not presently a shortage of oil production, but a short-term supply-to-demand ratio being manipulated by the oil producers, i.e., OPEC and the oil companies, who are maintaining the supply-to-demand ratio in short supply to charge a premium and maximize their profits.  Oil producers could marginally increase output to create a larger daily surplus, but that could reduce the price of oil.  There is no financial incentive for them to increase production beyond a short supply surplus.

Peak oil supply is an entirely different matter.  The theory has been extensively written about since M. King Hubbert developed his "Peak Theory" in 1956.  The theory postulates that "peak oil" is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. Prices increase rapidly as finite supplies of oil are exhausted.

Texas oilman T. Boone Pickens recently testified before the U.S. Senate Energy and Natural Resources Committee that "I do believe you have peaked out at 85 million barrels a day globally."  The Association for the Study of Peak Oil and Gas (ASPO) predicted in their January 2008 newsletter that the peak in all oil (including non-conventional sources), would occur in 2010.

The issue we face today is our national commitment to end our addiction and dependency on oil before we are confronted with the economic crisis of peak oil.  There is little time.  But the policy proposals being made today only seek to prolong our addiction to oil with short-term increases in oil supply to reduce the price of gas at the pump, rather than to end our dependency on oil.  We are still putting off to tomorrow what we should be doing today.  Conservation, new technologies, higher energy efficiency standards, higher CAFE standards, flex-fuel and all-electric vehicles, and the rapid development of renewable energy resources (solar/wind/geothermal/wave) would begin reducing U.S. demand for oil.  But this is only the beginning.  Much will remain to be done, and it will take a national commitment over decades to truly achieve energy independence.

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AZ BlueMeanie
The Blue Meanie is an Arizona citizen who wishes, for professional reasons, to remain anonymous when blogging about politics. Armed with a deep knowledge of the law, politics and public policy, as well as pen filled with all the colors stolen from Pepperland, the Blue Meanie’s mission is to pursue and prosecute the hypocrites, liars, and fools of politics and the media – which, in practical terms, is nearly all of them. Don’t even try to unmask him or he’ll seal you in a music-proof bubble and rendition you to Pepperland for a good face-stomping. Read blog posts by the infamous and prolific AZ Blue Meanie here.


  1. page 2 para 5

    “””That would nearly double total US Oil production, and increase natural gas production by 75%. It would also cut US oil imports by more than a third and be more than six times the estimated peak production from the Arctic National Wildlife Refuge (ANWAR)””1

    The Report shows a lack of understanding for basic economics in it’s opposition to opening ANWAR
    The Report cites – millions of barrels a day
     4.8 from 68million acres of non-producing leases
     0.78 from ANWAR on 1.5 million acrea.

    What is not pointed out is the 68 million acres of non-producing leases covers 31 states from New York to California and Florida to Washington and Alaska. ANWAR is 80 miles from the Alaskan Pipeline (at the western edge of the1002 area). If you were a prudent oil company where would you want to drill? .

  2. From the truth paper, page 1 para 3
    “”Between 1999 and 2007, the number of drilling permits issued for development of public lands increased by more than 361%, yet gasoline prices have also risen dramatically (figure 1) contradicting the argument that more drilling means lower gasoline prices. There simply is no correlation between the two.””

    The above percent increase is a fraud
    Why was 1999 chosen as the base period, because it has the lowest quantity of permits at 1,619 and with 2007 having the highest of 7,124. The result is the largest increase percentage which is important in their farce..

    To play the number game, the number of holes drills in 1999 (1,619) as compared to 2007 (5,343) gives a percent increase of 330%

    Again both numbers (permits and drilling) are meaningless for it is oil production should be the measurement. Drilling gets you to the production and is part of the equation.

    page 2 para 1
    In the past four years, the Bureau of Land Management has issued 28,776 permits to drill on public land; yet in that same time, 18.954 wells were actually drilled. This mean that companies have stockpiled nearly 10,000 extra permits to drill that they are not using to increase domestic production

    The nearly 10,000 permits being stockpiled is a pile.- page 2, para 1, line 3
     CNR Fraud
     Where did the number permits and wells drilled come from? Bureau of Land Management records do not match the number of permits and the number of wells drilled.
     BLM tables 3-16 for the fiscal year reports
     the BLM Excel file of the same data that has been updated to 28 February 2008..
     24,493 permits approved
     14,494 holes drilled

     Using FY 2004, CNR chose to commit more fraud: 2004 to 2007 have consistently high numbers with 2003 having a much lower number, which gives a higher number of unused permits

     Not every permit means there will be drilling with it Not every permit is used for not every lease is determined to be worth developing, even after having the permit

     Permits are only good for the lease they were applied for. Can not use a permit for one lease on another.

     Unused permits is gross CNR oversite or:a fraud The 10,000 unused permits was a simple subtraction of total holes drilled for the four year period from the total of permits approved for the four period. To apply the same CNR method to earlier periods, from FY 1988 through 2007 there were 16,929 unused permits which is an additional 7,000 unused permits. 16,929 is the difference between 62,882 approved drilling permits and the 45,963 holes drilled. Take it back even further and the unused number of permits gets even bigger. Since CNR says unused permits is a problem, then the problem has been ongoing for more than 20 years……or the offered proof is a fraud.

     What unused Drilling Permits show

     Intent to drill: A company invests one to two years to get a permit. (API Summary) A company would not apply for permits if there were no intent to drill. In the report on page 1, last line, the Report say the government is “handing out” permits.

     Long Range Planning – Drilling permits are applied for at the start of lease development, years before there is production, if any. Have approval up front for there is additional activity between the permit and exploratory drilling.

    page 2 para 4

    The Estimate Method Is Fraud .
     Because the estimation method applied producing lease amounts to non-producing leases based on only the number of non-producing leases and acreage. It is a meaningless number with connection to resevoire which was not done by CNR
     CNR Majority Staff source for non-producing lease information was the website of Materials Management Service. This is per my afternoon telephone call, 2 September 2008, with Deborah staff member, subcommittee on energy and minerals, of the Committee on Natural Resources. The MMS website contains only the acreage and the number of producing and non-producing leases by state. There is no connection between the MMS data and reserve estimates.
     No oil company, reservoir engineer, geologist uses the CNR method to estimate production. Industry production estimates involve reserve estimates and the CNR method did not include reserve estimates because reserve estimates for non-producing leases are not on the MMS website.
     Further indicators of fraud

     No issuance of such an estimate by the government agencies who provide such information to the government for no such estimate is on their websites, no press releases, not found searching the internet
     The report does not cite a source other than “we”
     The amount of increase was a specific number and none of the government agencies that provide such estimates give a single number and such a standard is known to the CNR
     The extrapolation method was not included with the report. To issue such a major statement with no support documentation or citation as to source is inadequate documentation
     The extrapolation method has not been released. There is no reason not to release the method other then to avoid exposure for fraud.
     Disagreement over the method with the CNR
     No Republican support, office of Don Young, Republican leader Committee, 202-225-0425
     Democrat David Born, Oklahoma did not support the report, per 26 Aug telephone conversation with female staffer who handles the Congressman’s energy matters.

    Page 3 Alaska para 3
    Within the National Petroleum Reserve – Alaska (NPR-A), oil companies have leased 3 million acres of the 22.6 million acres available to lease. No production has occurred on any of these lands and industry has drilled only 25 exploratory wells there since 2000.
     Wrong on the acreage available for all of the NPR-A is not available for lease.
     Wrong on the number of wells drilled, which is 26, with the most current once being completed 12 March 2008.

    Lease Sale1st2nd3nd4th5th – Sep
    # holes 260454142141

     Pure deception in the presentation of the wells drilled for the reading is all the wells were drilled in 2000
     There is no production because the lease is still under development since 1999 when the first lease sale was made. Companies have been there for almost 9 years and have spent billions but they are still there. If there was not a likely hood of a producing lease, they would not still be there.

  3. GOP Spartan, it is clear to me that you did not even read this post, based upon your childish comments.

    Did you not read that I said “Market forces are already leading the way to innovation, not government game show gimmicks.” I am a capitalist who believes in free market competition, not artificially constrained competition by the anti-competitive practices of the oil industry monopoly.

    Did you also not read that the oil companies are not developing the leases they have now, and it was the oil companies who made a profit-motive decision to close their U.S. oil refineries? You need to take a reading comprehension course, my friend.

    Nearly 70 percent of the 21 million barrels of oil the United States consumes every day goes for transportation, with the bulk of that burned by individual drivers. Build automobiles that do not rely on the outdated technology of the gasoline combustion engine, and the U.S. could reduce its oil consumption by 70% over time. But that would substantially reduce oil company profits as well, now wouldn’t it?

    So the oil companies have engaged in anti-competitive practices to prevent competition from new technologies that do not require gasoline from emerging on the market. In fact, oil companies have “diversified” into these new technologies in the hope of controlling the pace of development and market availability. That used to be known as restraint of trade and unfair competition.

    The New York Times reported on Sunday, “American Energy Policy, Asleep at the Spigot” (7/6/08) that:

    “Many [oil] analysts argue that increased drilling alone is no panacea. They note that many of the oil giants don’t drill in areas to which they already have access. Exxon, in particular, has been criticized as spending too much to buy back its own stock and not enough on exploration.

    * * *
    In any event, added drilling is unlikely to generate sharply lower prices. A recent study by the federal government’s Energy Information Administration estimated that under the best-case scenario opening up the Arctic National Wildlife Refuge would reduce prices by $1.44 a barrel by 2027. Drilling in broader swaths off the continental United States wouldn’t affect prices until 2030.”

    So even the oil industry anlysts, the experts, disagree with your childish comments.

    If you are the best the GOP has to offer, it is no wonder that the party is in such serious trouble.

  4. Go ahead and say it. You want to follow the lead of your buddy in Venezuela and want to nationalize the U.S. oil industry so your commie buddies can destroy our economy, weaken our country’s national security, and make everyone dependant of the dipsticks in Washington.

    Keep up the good work, you guys might actually turn a bad year for the GOP into a good one.

    If anything it’s time to unshackle the oil industry, do away with subsidies and tax credits, lift the ridiculous restrictions for drilling and let the market dig us out of the hole the Yo-yos and NIMBYs got us into.

    Drill Here, Drill Now, Pay Less! 73% of Americans are beginning to see the light and every time they fill up their tank, more and more of them are wondering why the hell we aren’t drilling for our own oil.

    It is you leftists that are driving us to kiss the rear ends of Middle Eastern dictators and the like by stopping us from leveraging our own energy reserves.

  5. The Los Angeles Times reports in “McCain’s Energy Record is On/Off” that his policy is to give tax credits and subsidies to oil, coal, and nuclear power.

    McCain has been a consistent opponent of standards that would require utilities to derive a minimum percentage of their power from renewable sources, such as wind, solar or geothermal.

    McCain has voted against renewable standards at least four times since 2002. He has also opposed tax incentives to encourage the development of power from sources other than nuclear.

    McCain opposed tax credits in 2001 and 2006 for companies that generate power from solar, wind, geothermal and ocean wave energy, all of which produce no greenhouse gases.

    McCain offered no proposal to expand the use of renewable energy.