Wednesday, June 18, 2008

Mutually Inclusive Solutions

The combination of the current presidential campaign and the high price of energy is prompting a long-overdue national debate on the relative contributions of the various energy options available to us. A new grassroots campaign, "Drill Here, Drill Now, Pay Less" is putting our self-imposed constraints on oil drilling at the center of that discussion, where it deserves to be, based on the scale of oil's contribution to the economy and the difficulty of replacing it any time soon. However, for this debate to be productive, we need to shed some of the hyperbole on both sides, and approach this as something other than a mutually exclusive proposition. The harsh reality of this energy crisis is that solving it will require more conventional energy, much more alternative energy, and a much greater emphasis on conservation, of which efficiency is only one component. Above all, we must learn an uncharacteristic degree of patience. It took us a decade to get into this fix; it could take at least that long to put this crisis behind us, and its ultimate resolution is unlikely to resemble the status quo ante.

Start with the rampant misunderstandings about the way oil production works. How often have we heard that the US consumes a quarter of world oil but has less than 3% of global reserves? That's true, but it is equally true--and much more relevant--that the US produces 10% of the world's oil output (including natural gas liquids) and has produced a cumulative 200 billion barrels from "proved reserves" that never exceeded 40 billion barrels. Nor do assertions that the remaining US oil resources would only amount to a few years of consumption correspond to the way oil is actually extracted. Oil fields produce over an interval determined by geology and technology, not wishful thinking. New fields brought on line this year will operate for anywhere from 10-40 years, and our current output is the aggregation of hundreds of thousands of wells in thousands of oil fields, with half of total production and 2/3rds of our reserves coming from the top 100 fields, a fifth of which were discovered since 1990.

In order to make sensible plans, we must also factor in the relative contribution of new increments of supply from the various possible sources. For example, after accounting for the oil, natural gas and electricity that go into its production, an extra billion gallons per year of corn ethanol yields the net energy equivalent of only 14,000 barrels per day of oil--the amount we get from a single, highly-productive deepwater oil well. A 3.5 MW wind turbine delivers, on average, as much electricity as could be generated by 230,000 cubic feet per day of natural gas. It takes 300 such turbines to produce as much energy as the least productive of the top 100 US gas fields. Replacing the energy content of current US net imports of petroleum and natural gas would require the equivalent of an extra 837 billion gallons per year of ethanol and 55,000 large wind turbines. Cut these figures in half to account for the potential contribution of conservation and energy efficiency, and they are still overwhelming, without a substantial contribution from additional conventional energy supplies.

On the other side, proponents of expanded drilling access need to be clear about the uncertainties and time lags involved. No one can predict the exact quantity of economic oil reserves--even at the current $130/bbl--into which the current estimate of up to 85 billion barrels of untapped US oil would translate. Members of Congress are already complaining that companies aren't drilling all the prospects that have been opened up to them in the eastern Gulf of Mexico, no doubt reflecting the availability of drilling rigs and personnel, and the relative rankings of all of the undrilled inventories of the lease holders. Nor does an exploration program yield immediate production. If a new field is adjacent to existing infrastructure, it might be brought onstream in three or four years. But that's not relevant to the portions of the offshore that are currently off limits. If new pipelines are required, that raises the bar for what will be economic, and it could extend the time from discovery to first production by years. With regard to the areas currently under drilling bans, we are thus debating our energy mix in the middle of the next decade, not today, and it's not obvious how the futures market would react to a green light for expanded drilling. Near-term price relief at the pump could be essentially zero, unless a perceived wave of new US supplies in 2012-2016 was sufficient to dry up the speculation that has compounded the very real tightness in the current global supply/demand balance.

As for the repeated assertions that more drilling won't amount to a hill of beans, we should apply some critical thinking and common sense to forecasts suggesting that even large increments of future production, as from the Alaskan National Wildlife Refuge, would hardly cause a ripple in world oil markets. I wonder how many of the economists responsible for these estimates have ever traded a barrel of oil. With enough supplies from all new sources, including oil, gas, and biofuels, we could shift the market dynamic that has tilted so strong in OPEC's favor and bring oil prices down, even if only to create policy headroom for a cap & trade system or carbon tax to address climate change.

Nor are the environmental trade-offs in this discussion as simple as many advocates would have the public believe. The latest science casts doubts on the greenhouse gas benefits of biofuels versus conventional fuels, and conventional oil emits less CO2 from well to tailpipe than the large-scale default options of extracting hydrocarbons from oil sands, oil shale, or coal. Producing more oil in the US, where industry practices are more strictly regulated than in developing countries, would not create an environmental catastrophe--perhaps quite the opposite.

I'm encouraged that this subject is finally getting the attention it merits and requires, even if the quality of the debate still leaves something to be desired. If we accept that there are no simple and obvious solutions to the fix we're in, then we should be willing to engage in a rational debate without resorting to unflattering characterizations of opposing viewpoints--or of the people holding them. At the same time, nothing should be off the table simply because it offends someone's sensibilities or beliefs. The potential contribution of expanded US oil drilling should not be dismissed out of hand or without carefully considering the combination of alternatives that would be required to make up for its continued exclusion, or without a serious assessment of whether replacing all oil use is even our highest priority, when power generation accounts for 20% more of our greenhouse gas emissions than transportation. Energy security can no longer be divorced from climate policy, and it's going to take real creativity and cooperation founded on mutual respect to tackle both of these problems simultaneously, as we must.

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