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.
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[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.
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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.
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, FactCheck.org: 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.