Wednesday, June 18, 2008

The Demand for Drilling

Not since the years of Jimmy Carter has the United States faced a greater energy crisis. While there are no shortages at the pump or plans to ration supplies, our nation’s neglect of energy infrastructure combined with a collective “not in my backyard” mentality has sentenced us to dependence on unstable and hostile regimes around the world. With supply and demand in such fragile balance, any political instability, terrorist attack, or shift in diplomatic relations could quickly send oil prices soaring further crippling our economy. We need more domestic drilling and we need it now.

In an attempt to bailout the credit crisis, the Federal Reserve has lowered its fed funds target interest rate to two percent. This has fueled a surge in inflation, debased our currency, and further precipitated the rise in the cost of oil. Opposition to domestic drilling by environmentalists has channeled government policy into “alternative energy” and led to the promotion and subsidization of corn based ethanol. As a result, commodity farm prices have soared as farmers shift production to corn while reducing acreage of wheat or soybeans. Ethanol has done little to solve our energy problems, but has further fueled core inflation in essential products such as food and energy. Combined with the tightening of credit following the mortgage and housing implosion, the increase in core inflation hits middle class consumers particularly hard and results in a significantly lower quality of living.

While alternative energy is the future, it will take years of additional research and development before any revolutionary technologies become available at affordable costs to consumers. Additionally, the high network and infrastructure barriers facing automobile producers create an uncertain environment and encourage innovation based on petroleum derived fuels. Honda’s new FCX Clarity fuel cell vehicle is a promising new technology, but the structural barriers facing innovative and revolutionary change discourage the allocation of capital to research and development. Mass production and distribution of hydrogen fuel cell vehicles is decades away and face significant barriers to widespread adoption. Despite much hype there are only 38 hydrogen fuel stations in California, with many of these owned and operated by the state, universities, or automobile manufacturers. Without significant infrastructure investment, consumers will be hesitant to buy such vehicles, but it is unlikely that current gas station owners will invest in hydrogen distribution without strong consumer demand. Ethanol fuel, known as E85, is a perfect example. Even with mass production and distribution of flex fuel vehicles, a very small percentage of gas stations sell E85 fuel. The substantial barriers imposed by the network externalities of alternative fuel technologies will create a significant impediment to mass adoption.

Despite optimistic projections by environmentalist groups, the ability of alternative energy to provide for our needs is limited without significant improvements in efficiency and conservation. These developments will take many decades before they are refined into commercially viable alternatives suggesting that further exploration and development of petroleum resources is required. Virtually all sources of domestic production have been off limits for more than 20 years. Congress has thwarted President Bush’s efforts to increase domestic drilling and develop a comprehensive energy policy, greatly contributing to the energy crisis that exists today. Until we develop the vast proven reserves in Alaska, the outer continental shelf, and shale formations in the West, we will continue to depend on others for critical energy needs. The lead time for diversifying our energy portfolio and constructing new facilities is significant, making us even more vulnerable to unstable foreign regimes and subject to growing competition for scarce resources. The time for action is upon us. Any further delays could lead us back to the dark ages – literally!

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6 comments:

George said...

Check this out if you want: http://www.smartmoney.com/invisiblehand/index.cfm?story=20080618-drilling-for-oil&cid=1122
Now how is domestic drilling going to benefit our country?

JB said...

Simple:

1) Lower Inflation and Lower Nominal Interest Rates – Lower inflation and interest rates aid economic growth
2) Lower Trade Deficit – We will reduce the amount of money we send to hostile regions of the world and support the American dollar from further devaluation
3) Domestic Investment and Job Creation – Many high paying jobs would be created in construction, exploration, production, and related industries
4) Greater Independence and National Security – We would lessen our reliance on unstable regions of the world for our critical energy needs
5) Reduced Environmental Impact – We would be shipping less oil halfway across the world cutting down on wasteful transportation expenses and related pollution

These, among many other reasons, support my argument for more domestic drilling for oil. While new oil developments, such as the Canadian Oil Sands, are not the easiest to extract, they are economically viable in the current environment and support thousands of jobs.

FourOhh said...

George's article totally neglects the oil shale in Colorado, Utah, et. al. area, which is estimated to represent three times the reserves possessed by Saudi Arabia (according to RAND).

At prices above $100 / barrel, the oil shale is easily profitable for oil companies (according to RAND). Unlike the oil sands which were released for oil production by Canada, our government continues to deny development of the oil shale, despite the fact that the majority of Utah residents support the development of the oil shale.

It is amazing that so many people are willing to only look at the half of the equation that partisan politics dictate they examine. Rather than looking to both demand and supply, democrats invariably look to lower demand, while republicans invariable look to raise supply. The solution lies in both raising the supply and lowering the demand.

SNi said...

George's article totally neglects the oil shale in Colorado, Utah, et. al. area, which is estimated to represent three times the reserves possessed by Saudi Arabia (according to RAND).

I don't ever see this discussed, but my understanding is that this extraction (shale) requires huge amounts of water, and water is a resource that is in short supply in many areas....

Lisa said...

I noticed your comment on "total buzz's Q&A with John McCain" done by Martin Wisckol, of the OC register, so I thought I'd check out your blog. Anyway, I totally agree with your views on this issue, and I think it's a very important one.

I haven't had a chance to check out any of your other posts yet, but I'm definitely going to.

G. Richard said...

It is thinking like this that has put us in the position where we are at. reagan and W put us more on oil and gas than any other presidents (clinton did start the battery initiative and Poppa Bush had the IFR).

All that is seen is to burn up our resources rather than move to another system. Even with a crash program in drilling funded by the feds and ignoring all environmental issues, it would take 5 years to get a drop. Long before that time, either OPEC will increase production or we will have dropped our demand dramatically.
Fuel cells are about the worst option that we have. Just to manufacture the hydrogen will be done by stripping the H from typically methane or oil. Then you have storage, and transportation issues. Even if you burn it in an ICE, you are looking at the equivalence of 10-20 mpg on an accord type sedan. IOW, it will make things worse, not better.

Far better that we move to PURE 100% electrical vehicles. We Americans typically have 2 cars per family. In the next 2 years, all Japanese car manufacturers will be building EV cars. Sadly, Detroit has decided that hydrogen and hybrids are the way to go. The good news is that small start-ups like Tesla will have general sedan production cars going within 2 years.

At that time, I think that we will see a run on Japanese and non-Detroit cars by Americans, while Detroit builders will wish for sales figures of today. No doubt they will still pay lip service to EV cars after that.