08/25/2008 - 08:47

Oil: To drill or not to drill

Kurt Zenz House

Kurt Zenz House

House is the Chief Executive and a co-founder of C12 Energy. For nearly a decade, House has studied the physics, chemistry, and economics of capturing and storing anthropogenic carbon dioxide in...

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We've all had the experience of talking with someone who has discovered "The Solution"--nearly always an overly simplistic idea that can only be advocated in the absence of accurate information. Regardless of subject matter, these acolytes insist that if the rest of us understood what they understand, then together, we could implement the obvious panacea. When implementation requires public policy, the believers become furious at policy makers whose intransigence --they believe--is dooming the country or even the world.

Examples of such mythical panaceas abound: "If only the Israelis would leave the West Bank, there would be peace in the Middle East." Or: "Eating locally grown food will save the environment." And don't forget: "Tax cuts always pay for themselves through higher economic growth." I could go on.

What we're watching is the thread of a decent argument--that when oil prices are very high, the United States should expand oil exploration and extraction--get oversold by liars and fools who cannot perform basic arithmetic."

For a long time, many in the oil and gas business have fervently believed in the virtue of expanded domestic exploration. I work in the fossil-fuel field, so I have sympathy for this position--we are, after all, in the business of finding, extracting, and utilizing fossil fuels. I've also had quite a few discussions with oilmen who sincerely believe that the primary source of America's problems is federal and state restrictions on domestic oil and gas exploration. There are good reasons to lift restrictions on domestic oil exploration. But the proponents of drilling are overselling its virtues by preaching fantasies about a transformed world.

The strongest argument for drilling is that the additional crude oil production will offset a small amount of imported oil. The U.S. trade deficit was $57 billion in July, while our oil import tab was about $52 billion. As I've written previously, wealth transfer from mostly democratic oil-importing countries to mostly autocratic oil-exporting countries isn't good for the world. Therefore, some benefit will come from decreasing that wealth transfer by increasing domestic oil extraction.

But the data clearly demonstrates that decreasing our dependence on foreign oil will require a lot more than expanded domestic oil extraction. In 1971, U.S. oil and gas-liquids consumption was about 15 million barrels per day, about 12 million of which was domestically extracted. In 2007, the United States consumed about 20 million barrels of oil and gas-liquids per day, and only about 6 million of those barrels were extracted from domestic reservoirs--the rest were imported. In other words, our consumption has soared while our own oil fields are being rapidly depleted. That trend is overwhelmingly due to geology and economics and can't be reversed with politics.

In 2007, the National Petroleum Council (NPC) published an excellent and comprehensive report recommending the expansion of domestic exploration. But it's sober about the potential impact. For example, only about 5 percent of the country's natural gas resource base is located in regions that are currently under moratoria. The fraction of the oil-resource base located in moratoria areas is probably bigger--perhaps as much as 30 percent. Still, the NPC estimates that if the moratoria were completely lifted, by 2025, the United States would be extracting an incremental 1 million barrels of oil per day--or about 5 percent of current demand. The Energy Information Administration estimates that U.S. oil demand will increase by about 10 percent by 2025. Likewise, conventional crude extraction from areas not under a drilling moratorium is projected to more or less stay flat for the next 15 years. Therefore, even with a complete repeal of the drilling moratoria, U.S. oil imports will have to grow in both relative and absolute terms to meet business-as-usual demand.

I must be clear that I do believe that the United States should expand domestic oil and gas exploration and extraction. Since we're paying more than $100 per barrel, the additional 1 million barrels extracted domestically per day would save us some $37 billion per year--or about 5 percent. A 5-percent reduction in the trade deficit shouldn't be easily dismissed. At that same time, it's ridiculous to believe that such a modest perturbation to the nearly $3.5-trillion global oil and gas market would have any meaningful impact on U.S. gas prices or bring any political pressure to bear on the major oil-producing nations.

Saudi Arabia is bringing online a single oil field next year that will extract more than 1.2 million barrels per day, or about 20 percent more than what the United States could expect to produce after 15 years by lifting the entire moratorium on drilling. By way of comparison, increasing the fuel economy of the U.S. auto and truck fleet by a modest 20 percent would decrease oil demand by nearly 1.5 million barrels per day--50 percent more than we could achieve by lifting the entire moratorium.

What we're watching is the thread of a decent argument--that when oil prices are very high, the United States should expand oil exploration and extraction--get hijacked and oversold by liars and fools who cannot perform basic arithmetic. Indeed, it appears that expanding domestic oil and gas exploration may become the signature issue of the 2008 presidential campaign. Voters are so obsessed with high gasoline prices--and apparently so mathematically challenged--that the slogan, "Drill here, drill now," has come to both symbolize presumptive Republican presidential nominee John McCain's campaign and to concisely sum up the absurd belief that if we only did so, the United States would be back on track. Indeed, McCain himself--a man for whom I have a great respect--appears to be playing the role of the newest apostle of the domestic drilling cult; and it's cliché that no one preaches as feverishly as the recently converted.

Of course, there are some decent reasons not to expand domestic oil exploration and extraction. Ten years ago, when oil was cheap, I felt strongly that we should buy all the foreign oil we could and save our own oil reserves for the future. Adherents to this argument sarcastically refer to expanded domestic drilling as "Draining America First." But today--with oil prices in the stratosphere--it makes more sense to expand our own production. That's to say, buying low and selling high is generally smart.

The other obvious reason not to drill is the potential environmental impacts. But I believe that argument is also oversold by zealous environmentalists. Two serious disasters--the 1969 Santa Barbara oil spill and the 1989 Exxon Valdez oil spill--seriously marred the environmental record of oil-exploration efforts. These incidents were positively awful, but they were dealt with, and the long-term impact was mitigated. Current drilling technologies are vastly superior to those used 40 years ago. Similarly, all new oil tankers have double hulls.

Then, of course, there's the real and serious problem of global warming. But here, again, we must consider the data and facts. A complete repeal of the moratorium might yield around an additional 10-15 billion barrels of oil over about the next 50 years. After combustion, that oil would yield about 6-9 billion tonnes of carbon dioxide. By comparison, global carbon dioxide emissions are around 30 billion tonnes per year, and it's likely that cumulative global carbon dioxide emissions over the next 50 years will exceed 1,500 billion tonnes. Therefore, the entire incremental carbon dioxide emissions from expanded U.S. drilling will comprise about 0.5 percent of total emissions. That is to say, there simply isn't enough domestic oil to make a difference on a global scale.

So what should we do? I think that we should "Drill here, drill now." But not because doing so will lower gasoline prices or have a meaningful effect on geopolitics. These arguments are so absurd that they deserve the moniker, "Faith-Based Energy Policy."

Rather, I think we should expand domestic oil exploration and extraction for two reasons: First, some good will come from modestly decreasing our oil-import tab; second, it will conclusively demonstrate that the claims made by drilling acolytes are profoundly oversold.

One reason we haven't made progress on a domestic energy policy is that every time we talk seriously about addressing our nation's oil addiction, drilling advocates refocus the argument on increasing domestic supply. Repealing the restrictions on domestic oil extraction has become a hot-button issue that only distracts us from hammering out serious energy policies such as a floor on gasoline prices, real fuel-economy standards for automobiles, luxury taxes on gas-guzzlers, proper incentives for both synthetic fuel and biofuels, and a serious effort to electrify the transportation sector. We'll continue to delay action on such policies until the false hope of expanded domestic drilling is done away with for good.

So let's run the experiment. Let's do all we can to expand domestic oil extraction. But once we lift the moratorium, I'll insist that the politicians who subscribe to faith-based energy policy stop their uniformed whining. Then, after we've increased our oil production by about 10 or 20 percent and still find our oil-import tab bigger than ever, can we please get serious about energy policy?