Monday, April 10, 2006

Splitting the Difference

It's remarkable that eight months after two hurricanes ripped through the heart of the offshore oil and gas drilling industry in the US, and with 14% of Gulf of Mexico natural gas production still shut in, we continue arguing about opening up other areas to drilling. Sunday's New York Times describes the controversy, which pits state against state, and against the federal government. When Florida's Senator Bill Nelson says, "They're using the fear of gas shortages in the aftermath of Katrina to get their way," it's clear that he just doesn't get it, nor is he alone. There's no fear of shortage; there is one, a real one, and it explains why natural gas is still going for over $6.00/million BTUs in April, instead of the $3.00-5.00 that would be more normal for this time of year.

In some respects it's too bad we had a much warmer than normal winter, because the weather bailed us out in ways that weren't apparent to those outside the industry. Even though natural gas prices peaked at just under $15.00, that's a far cry from what we'd have seen if January hadn't been 8 or 9 degrees above normal. We were headed for serious shortfalls and possible curtailment to industry, to keep residential customers supplied, and we dodged a bullet. But because the public and politicians have no idea how close we were to a crisis, they can focus on election year politics and argue over whether drilling 100 miles from Florida's coast is too close for the tourism and real estate interests that are driving this debate.

What these short-sighted concerns fail to address is the fundamental difference between falling short of domestic oil production and falling short of natural gas. When bad weather and ongoing depletion drive our oil production down to levels we haven't seen since the 1940s, we just dial OPEC and pay up. But when natural gas runs short, and we haven't built the LNG terminals that provide the only possible international safety valve, then not only do prices go up, but the people with whom we compete for scarce gas are all Americans. In other words, your local utility must compete with fertilizer and petrochemical plants, and regardless who wins, the US economy loses.

I only see one answer in the short run, and it's one that I suspect my industry friends won't like any better than my environmentalist friends: redefine all the offshore drilling bans to exclude natural gas. We may debate the economic and environmental impact of lower offshore oil production versus the higher imports that naturally follow, but we have left ourselves with no choice but to drill the hell out of every gas deposit we can find. Remember that all of the things people dread about offshore drilling are associated with the oil side. There are no "gas spills" to pollute the shoreline, nor tankers to run aground. You can't see a platform 100 miles away. Lumping offshore gas drilling in with oil drilling is irrational and destructive. It's past time to split our differences and agree to disagree on oil drilling, but turn natural gas loose.

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